FEDERAL ENERGY REGULATORY COMMISSION, PETITIONER V. MARTIN EXPLORATION MANAGEMENT COMPANY, ET AL. No. 87-363 In the Supreme Court of the United States October Term, 1987 The Solicitor General, on behalf of the Federal Energy Regulatory Commission (Commission or FERC), petitions for a writ of certiorari to review the judgment of the United States Court of Appeals for the Tenth Circuit in this case. Petition for a Writ of Certiorari to the United States Court of Appeals for the Tenth Circuit PARTIES TO THE PROCEEDINGS The petitioner is the Federal Energy Regulatory Commission. The respondents are Martin Exploration Management Company; Colorado Energy Corporation; Phillips Petroleum Company; Phillips Oil Company; Exxon Corporation; Shell Off-Shore, Inc.; Shell Western E & P, Inc.; Independent Oil & Gas Association of West Virginia; Amoco Production Company; Arco Oil & Gas Company; Ohio Oil and Gas Association; Independent Oil and Gas Association of West Virginia; Gulf Oil Corporation, successor to Chevron, U.S.A., Inc.; Union Oil Company of California; Champlin Petroleum Company; Pennzoil Company; Pennzoil Oil & Gas, Inc.; Pennzoil Producing Company; Placid Oil Company; Tennessee Gas Pipeline Company, a division of Tenneco, Inc.; Pacific Gas & Electric Company; Amoco Production Company; Transok, Inc.; Oklahoma Natural Gas Company, a division of Oneok, Inc.; Associated Gas Distributors; Public Service Commission of the State of New York; Pacific Lighting Gas Supply Company; Southern California Gas Company: Consolidated Gas Transmission Corporation; Panhandle Eastern Pipe Line Company; Cities Service Oil and Gas Corporation; Grace Petroleum Corporation; Valero Transmission Company; BHP Petroleum Company, Inc., successor to Monsanto Oil Company; Texas Eastern Transmission Corporation; Transwestern Pipeline Company; United Gas Pipe Line Company; United Texas Transmission Company; and Texas Gas Transmission Corporation. TABLE OF CONTENTS Questions Presented Parties to the Proceedings Opinions below Jurisdiction Statutes and regulations involved Statement A. Statutory background B. The Commission's rule C. The court of appeals decision Reasons for granting the petition Conclusion OPINIONS BELOW The opinion of the court of appeals (App., infra, 1a-28a) is reported, as modified, at 813 F.2d 1059. The order of the court of appeals modifying the original opinion (App., infra, 29a-31a) is not separately reported. The notice of proposed rulemaking of FERC (App., infra, 34a-60a) is reported at 49 Fed. Reg. 36399. The opinion accompanying issuance of the final rule by FERC (App., infra, 61a-103a) is reported at 49 Fed. Reg. 46874 and F.E.R.C. Stats. and Regs. para. 30,613. The FERC opinion denying rehearing in relevant part (App., infra, 104a-126a) is reported at 49 Fed. Reg. 50637 and F.E.R.C. Stats. and Regs. para. 30,622. JURISDICTION The judgment of the court of appeals (App., infra, 32a-33a) was entered on March 9, 1987. Petitions for rehearing were denied, with modifications of the original decision, on May 1, 1987 (App., infra, 29a-31a). On July 22, 1987, Justice White extended the time for filing a petition for a writ of certiorari to and including August 3l, 1987. The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1). STATUTES AND REGULATIONS INVOLVED Sections 101(b)(5), 107(c)(5), 121, and 122 of the Natural Gas Policy Act of 1978 (NGPA), 15 U.S.C. 3311(b)(5); 3317(c) (5), 3331, 3332, are set out in the appendix to this petition (App., infra, 127a-131a). Section 270.208 of 18 C.F.R. provides: First sales of natural gas that is deregulated natural gas as defined in Section 272.103(a) is price deregulated and not subject to the maximum lawful prices of the NGPA, regardless of whether the gas also meets the criteria for some other category of gas subject to a maximum lawful price under Subtitle A of Title I of the NGPA. QUESTIONS PRESENTED 1. Whether, as the Federal Energy Regulatory Commission determined, natural gas that is covered by two provisions of the Natural Gas Policy Act of 1978 (NGPA), 15 U.S.C. 3301 et seq. -- one of which sets ceiling on prices, the other of which declares prices deregulated -- must be treated as deregulated gas under the NGPA; or whether, instead, producers may choose, perhaps daily, the classification that, under current market conditions and their contracts, affords them the highest price. 2. Whether the Commission's ruling that most "new tight formation gas" under Section 107(c)(5) of the NGPA is automatically new gas under Section 102 or 103 of the Act is consistent with the Commission's authority under the NGPA. STATEMENT The Commission construed the NGPA to require, in accordance with the Act's overall scheme of phased-in deregulation, that natural gas that is qualified for both price-deregulated and price-regulated status under the Act be treated as deregulated. The court of appeals rejected the Commission's construction (App., infra, 10a). The court held that producers of natural gas could choose whatever statutory category afforded them the highest price under their contracts and market conditions at any particular moment, even if the choice meant returning deregulated gas to regulated status (id. at 17a, 30a). A. Statutory Background 1. Prior to 1978, producer (wellhead) natural gas sales, if made in interstate commerce, were governed by the Natural Gas Act, 15 U.S.C. 717 et seq. Following this Court's decision in Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672 (1954), the Federal Energy Regulatory Commission (and its predecessor, the Federal Power Commission) established just-and-reasonable ceiling rates for such sales. Those rates were generally lower than what producers could command selling gas in the unregulated, intrastate market. See Public Service Comm'n v. Mid-Louisiana Gas Co., 463 U.S. 319, 327-331 (1983). "By the 1970's, however, it became clear that the existing regulatory structure was inadequate" (App., infra, 3a). The combination of price ceilings applicable to interstate sales and no constraints on intrastate sales artificially reduced supply and inflated demand in the interstate market. Ibid.; Breyer & MacAvoy, The Natural Gas Shortage and the Regulation of Natural Gas Producers, 86 Harv. L. Rev. 941 (1973); Note, Legislative History of the Natural Gas Policy Act: Title I, 59 Tex. L. Rev. 101, 106-112 (1980). In 1977, the House and Senate each passed bills designed to address the problem. The House, as part of a broader National Energy Act, passed a bill that would have extended regulatory controls by imposing uniform price regulation, at levels aimed at encouraging production, on all natural gas, interstate or intrastate (H.R. 8444, 95th Cong., 1st Sess. (1977)). The Senate took a radically different approach. It passed a bill (S. 2104, 95th Cong., 1st Sess. (1977)) that provided for deregulation of all natural-gas prices by 1982, with certain price controls in the interim. See Public Service Comm'n v. Mid-Louisiana Gas Co., 463 U.S. at 331-332; Note, supra, 59 Tex. L. Rev. at 113-115. The conflict between the houses went to a Conference Committee, which proposed an entirely new bill roughly one year later (H.R. 5289, 95th Cong., 2d Sess. (1978); H.R. Conf. Rep. 95-1752, 95th Cong., 2d Sess. (1978)). The conference bill struck a compromise between the House's proposed increased regulation and the Senate's proposed rapid deregulation (see H.R. Conf. Rep. 95-1752, supra, at 67-68; 124 Cong. Rec. 38361 (1978) (remarks of Rep. Dingell); Public Service Comm'n v. Mid-Louisiana Gas Co., 463 U.S. at 331)). The bill brought interstate and intrastate gas under a single "'national market price regulatory scheme'" (Transcontinental Gas Pipe Line Corp. v. State Oil & Gas Bd. (Transco), No. 84-1076 (Jan. 22, 1986), slip op. 11, quoting Haase, The Federal Role in Implementing the Natural Gas Policy Act of 1978, 16 Hous. L. Rev. 1067, 1079 (1979)); replaced Commission-set ceilings (at "just and reasonable" rates) with price ceilings generally set directly by statute, many designed to provide incentives for new production; and mandated "deregulation of most categories of natural gas" (H.R. Conf. Rep. 95-1752, supra, at 68) after a transition period of up to nine years. See Note, supra, 59 Tex. L. Rev. at 116. Enacted as the NGPA, the bill thus "comprehensively and dramatically changed the method of pricing natural gas produced in the United States" (Public Service Comm'n v. Mid-Louisiana Gas Co., 463 U.S. at 322). 2. Title I of the NGPA creates the scheme of "phased deregulation" (124 Cong. Rec. 38361 (1978) (remarks of Rep. Dingell)) in two stages. Subtitle A (NGPA Sections 101-110, 15 U.S.C. 3311-3320) defines numerous categories of natural gas and establishes (or, in a few exceptional cases, permits the Commission to set) "maximum lawful price(s)" for wellhead "first sale(s)" of gas in each category. /1/ Subtitle B (NGPA Sections 121-123 (15 U.S.C. 3331-3333)) then provides for the removal of certain of those ceilings after periods ranging from several months to nine years. More particularly, Subtitle A defines numerous categories of natural gas, /2/ which, aside from a catch-all residual category (NGPA Section 109 (15 U.S.C. 3319)), fall roughly into three groups. (1) Four provisions set prices (or authorize the Commission to do so) that are designed to furnish incentives for new production: Sections 102 and 103 (15 U.S.C. 3312, 3313) cover certain new natural gas; /3/ Section 107 (15 U.S.C. 3317) covers certain "high-cost" natural gas; /4/ Section 108 (15 U.S.C. 3318) covers gas from certain low-producing "stripper" wells. /5/ (2) Two provisions (Sections 104 and 106(a), 15 U.S.C. 3314, 3316(a)) cover "old" interstate gas -- gas dedicated to interstate commerce prior to the NGPA's effective date or sold under "rollover" interstate contracts -- and set non-incentive, consumer-protection price ceilings based on the Natural Gas Act. (3) Two provisions (Sections 105 and 106(b), 15 U.S.C. 3315, 3316(b)) cover "old" intrastate gas -- defined analogously to "old" interstate gas -- and set price ceilings tied to those for "new" Section 102 gas. Section 121 (15 U.S.C. 3331), the central provision of Subtitle B, mandates the elimination of price ceilings for certain of the categories of natural gas specified in Subtitle A. /6/ Most important, on January 1, 1985, price ceilings were eliminated from certain of the incentive-priced gas qualifying under Sections 102 and 103 ("new" gas) and under Sections 105 and 106(b) ("old" intrastate gas) (15 U.S.C. 3312, 3313, 3315, 3316(b)). /7/ See NGPA Section 121(a), 15 U.S.C. 3331(a). /8/ Some gas, however -- notably, certain "high-cost" gas (Subsection 107(c)(5)) and "stripper well" gas (Section 108, 15 U.S.C. 3318) -- remains subject to price ceilings. Section 122 (15 U.S.C. 3332) completes the deregulation scheme by giving the President and Congress an option for a one-time 18-month reimposition of price controls, an option that expired on June 30, 1987, without having been invoked. 3. The categories defined by the provisions of Subtitle A overlap: substantial quantities of natural gas can qualify simultaneously under more than one provision. /9/ In addition to the overlap of several regulated categories, there is overlap between categories that remain subject to price ceilings (regulated gas) and categories that are free from any maximum lawful price (deregulated gas). For example, the categories defined by Sections 107(c)(5) and 108 (15 U.S.C. 3317(c)(5), 3318) (certain high-cost natural gas and stripper-well gas), which remain subject to price ceilings, overlap significantly with the new-gas categories defined by Sections 102 and 103 (15 U.S.C. 3312, 3313), which are now deregulated. See App., infra, 43a, 73a. The NGPA contains a provision addressed to the general question of such "dual-qualified" gas. In Section 101(b) (15 U.S.C. 3311(b)), which sets forth "Rules of general application," Subsection (b)(5) states: (5) Sales qualifying under more than one provision. -- If any natural gas qualifies under more than one provision of this title providing for any maximum lawful price or for any exemption from such a price with respect to any first sale of such natural gas, the provision which could result in the highest price shall be applicable. /10/ B. The Commission's Rules As the principal deregulation date (January 1, 1985) approached, the Commission found it necessary to consider the proper treatment of gas that qualified for both regulated and deregulated treatment. At the time the NGPA was enacted in 1978, it appears to have been universally assumed that market prices would be higher than the statutory ceilings, so that producers would prefer deregulated treatment. By the end of 1984, this situation had been reversed. See App., infra, 22a-23a. Consequently, many producers preferred their dual-qualified regulated-deregulated gas to be treated as still subject to a regulated price. /11/ See App., infra, 73a-78a. In September 1984 the Commission proposed a regulation to determine the legal treatment of gas that is qualified for both deregulated and regulated treatment. /12/ App., infra, 43a-45a. After receipt of comments, the Commission, in November 1984, issued a final rule establishing that, as of January 1, 1985, gas that is qualified for a category not subject to any price ceiling would be treated as deregulated and could be sold at any price the market would bear, even if the gas also is qualified for one of the categories still subject to statutory price ceilings. App., infra, 73a-82a; see page 2, supra (quoting rule, 18 C.F.R. 270.208). Noting that market prices were then below statutory ceiling prices, that "Congress may not have anticipated such a situation" (App., infra, 75a), and that many producers would therefore prefer to remain subject to price regulation, the Commission construed the NGPA to mandate deregulation. /13/ The Commission based this conclusion, first, on Section 121 of the NGPA (15 U.S.C. 3331), which by its terms mandates the removal of Subtitle A's price ceilings for the specified categories of natural gas. The Commission read the provision to embody Congress's mandate to "phase from regulated ceiling prices in the short term to market clearing prices in the long term" (App., infra, 76a). See App., infra, 75a-77a. The Commission pointed out (App., infra, 74a; see also App., infra, 43a) that "the overall scheme envisioned by Congress when it enacted the NGPA (was) to provide incentive prices to encourage exploration and development of new reserves in the short-term, and to gradually substitute market forces for regulated prices by phasing in deregulation in 1985 and 1987." The Commission likewise construed Section 101(b)(5) (15 U.S.C. 3311(b)(5)) to require deregulated treatment of gas that falls under both a provision setting a ceiling price and one eliminating any legal ceiling price (App., infra, 78a-79a). /14/ The Commission concluded that Section 101(b)(5), in declaring applicable whichever of the competing provisions "could result in the highest price," means that "the deregulated price, which always could result in a price higher than a regulated price, prevails" because "there always exists at least the potential for the parties to negotiate a contract above the old regulated ceiling price" (App., infra, 79a (emphasis in original)). The Commission further explained on rehearing (App., infra, 111a (footnote omitted; emphasis in original)): "Without question, a deregulated price could always result in a price higher than a regulated price which is subject to a ceiling price; whether the contract allows the producer to collect a price higher than a regulated price is a contractual issue, not an issue raised by the deregulation scheme of the NGPA." /15/ C. The Court of Appeals Decision On petitions for review filed by numerous producers under Section 506 of the NGPA (15 U.S.C. 3416), the court of appeals rejected the Commission's interpretation of Sections 101(b)(5) and 121 (15 U.S.C. 3311(b)(5), 3331) of the NGPA. App., infra, 1a-24a. The court first concluded that Section 121 is ambiguous, because, although it commands the elimination of price ceilings for the listed categories of natural gas, it does not explicitly address the subject of deregulated gas that simultaneously qualifies for a regulated category (App., infra, 10a-11a). The court then stated that, despite the ambiguity, it could not defer to the Commission's interpretations, because "Congress anticipated precisely this question in Section 101(b)(5)" (App., infra, 11a) and the Commission's ruling was contrary to the "unambiguous language" of that provision (App., infra, 13a). After concluding that Section 101(b)(5) applies to all dual-qualified gas, even if one of the overlapping categories is deregulated, /16/ the court held that the "could result" language of Section 101(b)(5) expressly and unambiguously gives producers the right to choose, at any particular moment, whatever category, regulated or deregulated, provides the highest price under their contracts. App., infra, 16a-17a; id. at 30a (modification on petitions for rehearing). While recognizing that "the price of deregulated natural gas in an open market 'could' theoretically reach infinity" (App., infra, 15a), the court reasoned that at least certain price ceilings for regulated gas "could" also rise indefinitely. /17/ The court stated that the Commission's reading of Section 101(b)(5) "considers only the theoretical possibilities (and) renders Section 101(b)(5) meaningless" (App., infra, 16a). The court concluded that Section 101(b)(5) "requires a comparison of the applicable price for each category at a particular moment" based on producers' actual contracts (App., infra, 16a), with the higher price governing (id. at 16a-17a). In support of that conclusion, the court indicated that it read the NGPA, informed by several congressional floor statements, as granting a producer the right to "select the category or categories for which he or she desires to qualify particular gas" (App., infra, 19a). See App., infra, 18a-19a (citing 124 Cong. Rec. 29109 (1978) (remarks of Sen. Jackson); id. at 38363-38364 (remarks of Rep. Dingell)). /18/ The court also criticized the Commission's reliance on phased deregulation as the overall plan of the NGPA. Phased deregulation is only one means of achieving the ultimate statutory aim of ensuring adequate supplies at fair prices, the court stated (App., infra, 20a). Briefly mentioning a few statements from the NGPA's legislative history (App., infra, 21a-22a n.15), the court noted that the cited passages had "somewhat contradictory" implications (id. at 21a n.15). Indeed, the court recognized that "Congress did not expect that natural gas prices would fall" and hence did not anticipate the situation presented to the Commission in 1984 and today -- that of producers wishing to remain under regulation (id. at 22a-23a). The court of appeals also recognized that, under its view, Section 101(b)(5) "can have the unanticipated effect of operating as a price floor for producers" (App., infra, 23a). Nevertheless, the court felt itself bound by "the intent of Congress as evidenced in the unambiguous language of (the NGPA)" (App., infra, 24a). REASONS FOR GRANTING THE PETITION The Tenth Circuit decision is clearly incorrect. The Commission properly concluded, in construing a statute it is charged with administering, that Section 101(b)(5) of the NGPA requires price deregulation for gas that is qualified for both a regulated and a deregulated category. /19/ The decision of the court of appeals, if permitted to stand, would impose enormous additional costs on purchasers of natural gas. 1. To begin with the statutory language, the most natural reading of Section 101(b)(5) is that, if natural gas is subject to two or more provisions of the NGPA, the "provision which could result in the highest price" is the provision that, solely with reference to limits imposed under the NGPA, permits the highest price. See also H.R. Conf. Rep. 95-1752, supra, at 74 (emphasis added) ("the provisions that permit the seller to obtain the highest price"). Section 101(b)(5) thus calls for a comparison of existing legal limits on the prices producers may charge (in most cases set directly by the NGPA, in some cases set by the Commission pursuant to statutorily delegated authority). Where one provision sets a maximum lawful price and another declares that there is no such ceiling, the latter provision governs because it leaves the producers free to charge the higher price -- namely, any price, as far as the NGPA is concerned. Contrary to the court of appeals' view, the statutory language contains no hint that it calls for comparison of producers' contracts. Section 101(b)(5) refers only to comparing "provision(s)," not to comparing contracts. Moreover, the use of the statutory phrase "could result" is inconsistent with a focus on actual contract prices. To achieve the court of appeals' result, it would have been more natural for Congress to have declared applicable the provision that "results" or that "would result" in the highest price. Congress instead used the word "could," referring to the range of legally permitted possibilities. The court of appeals appears to have misunderstood the Commission's construction, and was plainly mistaken in concluding that the Commission's view rendered Section 101(b)(5) meaningless (App., infra, 15a-16a). A provision that eliminates price ceilings always permits the seller to obtain, i.e., always "could result" in, a higher price than a provision that, directly or through statutorily delegated Commission action, sets an upper cap on producers' prices. The Commission's interpretation leaves no doubt about which provision governs under Section 101(b)(5). The court of appeals' reference to the Commission's power to set certain "just and reasonable" rates and to the raising of ceiling prices by inflation adjustments over time (see note 17, supra) was simply irrelevant. Section 101(b)(5) is not concerned with "theoretical" possibilities at a particular moment or over an indefinite period. It is concerned only with what the law permits, not with what market conditions or imagination permit. A provision that removes upper caps permits a higher price than one that sets an upper cap (even if that cap is adjustable), and the former provision therefore governs under Section 101(b)(5). 2. The court of appeals' focus on producers' actual contract prices (and their fluctuation) is inconsistent not only with the language of Section 101(b)(5) but with the approach to price regulation taken by Title I of the NGPA as a whole. As reflected in the Commission's view, the NGPA regulates only legal upper limits, not producers' actual prices. Thus, the price-regulation provisions of Subtitle A do not establish the prices that producers must charge; rather, they are concerned solely with setting "maximum lawful price(s)" or "ceiling prices." Section 504(a) (15 U.S.C. 341(a)) enforces the ceilings by declaring it unlawful "to sell natural gas at a first sale price in excess of any applicable maximum lawful price." Moreover, to underscore the exclusive concern with upper limits, Section 101(b)(9) (15 U.S.C. 3311(b)(9)) expressly declares that contract prices are enforceable as long as they are lower than any applicable statutory ceiling, and are always lawful if a price-deregulation provision applies. Congress clearly sought to set only maximum prices and otherwise to leave the establishment of the prices producers would actually charge to private decision. The court of appeals read Section 101(b)(5) to require comparison of producers' actual contract prices, rather than of upper caps on the range of legally permitted prices. That reading would erroneously treat Section 101(b)(5) as specifying the actual prices producers must charge -- namely, the highest of the applicable contract prices. It would do so, moreover, even when the two overlapping categories at issue both set ceiling prices (i.e., in the case of dual-qualified regulated-regulated gas), requiring comparison not of the ceilings but of the actual contract prices. Nothing in the statute or in the court of appeals' opinion supports such a result. Indeed, it is squarely contrary to the fact that Section 101(b)(5) does not establish the governing price but only declares what "provision" governs, and that the provisions of Title I, in turn, establish only ranges of legally permitted prices. See also 124 Cong. Rec. 38363 (1978) (emphasis added) (Section 101(b)(5) "is intended to facilitate resolution of which ceiling price may apply if more than one ceiling price rule appears applicable. Whichever ceiling price could result in the highest price is the applicable maximum lawful price.") In short, the court of appeals' reading of Section 101(b)(5) would render the provision a glaring anomaly in a statute otherwise pervasively concerned only with ceiling prices. 3. The court of appeals' ruling is also inconsistent with the fundamental policy underlying the NGPA. The clear overall scheme of the NGPA is one of "phased deregulation" (124 Cong. Rec. 38361 (1978) (remarks of Rep. Dingell); see also id. at 29659 (remarks of Sen. Percy) ("the phased deregulation schedule * * * really is at the heart of this bill"). The Conference Report describes Title I of the NGPA as providing for the eventual "deregulation of most categories of natural gas" (H.R. Conf. Rep. 95-1752, supra, at 68). That policy reflected Congress's belief, as this Court recognized in Transco, slip op. 14 (footnote omitted), that "direct federal price control exacerbated supply and demand problems by preventing the market from making long-term adjustments." Congress decided to phase in deregulation over a nine-year period as a compromise between "two strong, but divergent, responses to the natural gas shortage" (Public Service Comm'n v. Mid-Louisiana Gas Co., 463 U.S. at 331), one seeking to extend price controls (the House bill), the other seeking full decontrol as quickly as possible (by 1982, under the Senate bill). See Lovett, Incentive and Conservation Effects: Natural Gas Policy Act of 1978, 16 Hous. L. Rev. 1129, 1145 (1979). /20/ To the extent that Congress deregulated "particular aspects of the first sale of gas, it did so because (after the specified phase-in periods) it wanted to leave determination of supply and first-sale price to the market" (Transco, slip op. 12). Contrary to the court of appeals' view, it was proper for the Commission to support its ruling by observing that treating dual-qualified regulated-deregulated gas as deregulated is in keeping with Congress' overall phased-deregulation objective of the NGPA. The court of appeals' interpretation of Section 101(b)(5) by contrast is incompatible with the congressional scheme. The court's decision establishes a uniform and permanent producer-assistance policy. But while the temporary incentive-price provisions of the NGPA were indeed intended to spur production, the deregulation policy that has now been phased in for most categories of gas is not intended to favor producers or production. Rather, deregulation is designed to let market forces determine prices and supply (see Transco, slip op. 12), and lower prices and lower production are one possible natural consequence of such a system. The court of appeals' reading of Section 101(b)(5) is incompatible with the scheme of phased deregulation in another way as well. The court's reading would permit a producer to switch back and forth between deregulated and regulated status, with no apparent limitation, as market prices rose or fell. The potential for return of deregulated gas to regulated status is a continuing one, because deregulated "new" gas (under Sections 102 and 103 (15 U.S.C. 3312, 3313)) will always become regulated "stripper well" gas (under Section 108 (15 U.S.C. 3318)) as the well diminishes in production. There is certainly no indication that the NGPA contemplates such a peculiar result. Indeed, the congressional aim to make a transition to a market system for most natural gas strongly suggests the contrary. The intended transition is reflected in Section 122 (15 U.S.C. 3332), which establishes only one method to call off deregulation (action by the President or Congress), and then only temporarily and only once. 4. The court of appeals also erred in finding that its ruling was supported by a congressional commitment to the principle of producer choice. The language of Section 101(b)(5) itself refutes the suggestion that the statute embodies such a principle for dual-qualified gas. The provision declares what price provisions govern; it does not give producers any choice in the matter. The court of appeals' reference to producers' right to choose which among several available qualifications to apply for, whatever its correctness, is simply irrelevant. The Commission's rule here at issue applies, among gas that is required to be administratively qualified, only to gas that has in fact been dually qualified in both regulated and deregulated categories. See note 12, supra. Whether producers have an indefeasible right to select one or more applicable categories in qualifying their gas under Section 503 (15 U.S.C. 3413) /21/ is entirely distinct from the question presented in this proceeding -- which of several already-selected categories applies after deregulation. The former question is also of little remaining practical importance, in comparison with the question presented here. /22/ The two congressional floor statements cited by the court of appeals (App., infra, 18a-19a), even aside from questions about their power to modify the statute's command, do not establish a relevant statutory principle of producer choice. First, they are addressed not to the question at issue here but to the distinct question of producers' ability to select what qualifications to seek. Second, both statements, responding to concerns about the potential administrative burdens on the agencies that determine the classification of natural gas, merely affirm that the agencies have no statutory obligation to search through all possible classifications, demand all potentially relevant information from producers, and independently determine the proper category (see App., infra, 19a (quoting statements)). Neither statement suggests that the classification task itself may not be simplified, in comformity with the NGPA, by requiring permanent deregulated treatment of gas that falls into both a regulated and a deregulated category. /23/ In any event, as even the court of appeals recognized (App., infra, 21a-22a n.15), specific statements in the legislative history on dual-qualified gas must be given little weight. Not only are the implications contradictory, but all statements were made on the factual assumption, which has turned out to be false for the past several years, that market prices would be higher than the price ceilings set in the statute. The 1978 Congress, because of that assumption, simply had no occasion to consider the possibility that the deregulated price might not in fact be the price chosen by producers. There is, accordingly, no relevant evidence that Congress intended a principle of producer choice to override the command to deregulate. /24/ 5. For all of the above reasons, the court of appeals' decision is erroneous: it creates a bizarre system of natural gas regulation (permitting repeated transfers of natural gas in and out of regulation) that is contrary to the language, structure, and overall aims of the NGPA. That conclusion is warranted independent of any deference to the Commission. But even if the statutory meaning is less than crystal clear, "a court may not substitute its own construction of a statutory provision for a reasonable interpretation by the * * * agency" entrusted with administration of the statute. Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 844 (1984) (footnote omitted). See also Clarke v. Securities Indus. Ass'n, No. 85-971 (Jan 14, 1987), slip op. 14-15; Japan Whaling Ass'n v. American Cetacean Soc'y, No. 85-954 (June 30, 1986), slip op. 11; Young v. Community Nutrition Inst., No. 85-664 (June 17, 1986), slip op. 5-7. The Commission's interpretation is unquestionably reasonable /25/ and should have been upheld by the court of appeals. Mid-Louisiana Gas Co., 463 U.S. at 339. 6. The decision of the court of appeals should be reversed. This Court should not await development of a conflict among the circuits. So many gas producers were party to this challenge to the regulation that, for that reason alone, a conflict is unlikely to develop, at least in the near term. Meanwhile, the problem is of considerable practical importance. The Commission estimates that the 1985-1987 cost of the court of appeals' decision in higher natural-gas prices is approximately $300 million, and the costs continue to mount. CONCLUSION The petition for a writ of certiorari should be granted. Respectfully submitted. DONALD B. AYER Acting Solicitor General* RICHARD G. TARANTO Assistant to the Solicitor General CATHERINE C. COOK General Counsel JEROME M. FEIT Solicitor JOEL M. COCKRELL JOHN H. CONWAY Attorneys Federal Energy Regulatory Commission *The Solicitor General is disqualified in this case. AUGUST 1987 /1/ A "first sale" is most often, but not exclusively, a sale by the producer of the natural gas (NGPA Section 2(21), 15 U.S.C. 3301(21)). /2/ The category-defining sections are Sections 102-109 (15 U.S.C. 3312-3319). Section 101 (15 U.S.C. 3311) defines the annual inflation adjustment factor and other "(r)ules of general application" relevant to the remainder of the Act. Section 110 (15 U.S.C. 3320) concerns the treatment of state severance taxes and certain production-related costs. /3/ Section 102 (15 U.S.C. 3312) covers gas from a new reservoir, from certain new Outer Continental Shelf leases, or from a new well drilled sufficiently far from certain existing "marker" wells. Section 103 (15 U.S.C. 3313) covers certain new onshore production wells. /4/ Section 107 (15 U.S.C. 3317) defines four categories of high-cost gas (Subsections (c)(1) through (4)) and allows the Commission to designate other gas that is especially costly or risky to produce (Subsection (c)(5)). /5/ A "stripper" well is one that produces 60 Mcf or less per day. See NGPA Section 108(b), 15 U.S.C. 3318(b); NGPA Section 2(29) (15 U.S.C. 3301(29)) (defining "Mcf"). /6/ Specifically, Section 121(a) states: "Subject to the reimposition of price controls as provided in section 122, the provisions of subtitle A respecting the maximum lawful price for the first sale of each of the following categories of natural gas shall, except as provided in subsections (d) and (e), cease to apply effective January 1, 1985 * * * ." Subsection (d) is not relevant to this case. Subsection (e) limits the deregulation of one category (Section 105(b)(3), 15 U.S.C. 3315(b)(3)) of gas. See note 24, infra. /7/ Certain "old" intrastate gas covered by Section 105 continues to be subject to price ceilings. See NGPA Section 121(e) (15 U.S.C. 3331(e)). /8/ In addition, pursuant to Section 121(b) (15 U.S.C. 3331(b)), on November 1, 1979, price ceilings were removed from some "high-cost" gas under Section 107(c) -- namely, gas under Subsections (c)(1)-(4) (15 U.S.C. 3317(c)(1)-(4)). (Gas under Subsection (c)(5) (15 U.S.C. 3317(c)(5)) remains subject to price ceilings.) Also, on July 1, 1987, price ceilings were removed from "new" Section 103 gas produced from shallow wells never previously dedicated to interstate commerce. See NGPA Section 121(c), 15 U.S.C. 3331(c). /9/ Pursuant to NGPA Section 503, 15 U.S.C. 3413, producers obtain rulings on the proper classification or classifications of "new," high-cost and stripper-well gas from certain state or federal agencies, subject to Commission review. Dual qualification is permitted. See 124 Cong. Rec. 38364 (1978) (explanatory statement on conference bill by Reps. Dingell, Staggers, Ashley, Eckhardt, and Wilson). /10/ The Conference Report explains (H.R. Conf. Rep. 95-1752, supra, at 74): The conference agreement provides that if natural gas qualifies under more than one price category, the provisions that permit the seller to obtain the highest price applies (sic). If a seller wishes to change the category under which production from a given well qualifies, he must apply to the appropriate State or Federal agency with authority to make determinations under section 503. /11/ Many producers have contracts that fix the price of their gas far into the future, often providing alternative prices depending on the regulatory classification of the gas and leaving it up to government action (statute, regulation, order) to determine the classification of the gas. The price fixed for regulated gas is commonly at or near the maximum lawful price. By contrast, the price for gas treated as not subject to a price ceiling is typically based on market prices. As a result, when market prices are below the statutory ceilings, many producers wish to have their gas treated as falling within one of the still-regulated categories, so that they can collect a higher price. /12/ The Commission addressed only gas that actually is qualified in two categories by the relevant state or federal agency (insofar as qualification is needed for sale in a category), not all gas that could conceivably be so qualified. See 18 C.F.R. 270.208, referring to 18 C.F.R. 272.103(a), which defines deregulated gas to include only gas actually qualified by the relevant agency (and certain "old" intrastate gas, which need not be so qualified). Certain other issues were addressed in the rulemaking proceeding and in the court of appeals. We discuss only the dual-qualification questions. /13/ The Commission also noted that, in 1979 and 1980, when market conditions were different, several producers, including some of respondents here, specifically argued in favor of the construction of the NGPA adopted by the Commission in the proceedings at issue in this petition. App., infra, 74a & n.10. /14/ The Commission stated that the provision was "helpful, but not dispositive" of the issue (App., infra, 78a). /15/ In the course of explaining its rule for the treatment of dual-qualified regulated-deregulated gas, the Commission also ruled (App., infra, 81a-82a; see also App., infra, 114a-116a) that any qualification of gas as "new tight formation" gas under Section 107(c)(5) and the implementing regulations (e.g., 18 C.F.R. 271.703(b)) automatically qualifies the gas (except for certain "recompletion tight formation gas," App., infra, 82a n.18)) as new gas under Section 102 or 103, hence placing it under deregulation. /16/ The court reasoned that Section 101(b)(5), in using the word "exemption" when referring to provisions "providing for any maximum lawful price or for any exemption from such a price," applies to statutory provisions declaring gas prices deregulated. The court rejected the suggestion that the term "exemption" applies only to the provisions (Sections 104(b)(2), 106(c), 109(b)(2), 15 U.S.C. 3314(b)(2), 3316(c), 3319(b)(2)) that grant the Commission authority to set special "just and reasonable" ceilings higher than statutory ceilings for particular categories. The court pointed out that another of the "Rules of general application" -- namely, Section 101(b)(9) (15 U.S.C. 3311(b)(9)) -- uses "exempted" and "exemption" to refer to provisions that deregulate gas prices (App., infra, 14a-15a). /17/ The court noted that the Commission could set price ceilings at "just and reasonable" rates under certain regulated-price provisions (Sections 104(b)(2), 106(c), 109(b)(2), 15 U.S.C. 3314(b)(2), 3316(c), 3319(b)(2)) and that the Subtitle A ceiling prices generally rise with inflation. "The price of regulated gas is therefore certain to rise, and is capable of reaching an indefinite 'just and reasonable' rate." App., infra, 15a-16a. /18/ The court expressed this view in rejecting the Commission's ruling that most Section 107(c)(5) "new tight formation" gas (15 U.S.C. 3317(c)(5)) is automatically also gas under Section 102 or 103 (15 U.S.C. 3312, 3313), a ruling that both the Commission and the court treated as part of the broader dual-qualification ruling (App., infra, 18a-19a; see note 15, supra). The court agreed that, with the "recompletion" exception acknowledged by the Commission (see note 15, supra), new tight formation gas in fact always meets the definitions under Section 102 or 103. But the court held that Congress had given producers the right to choose what categories to apply for, so that they could avoid qualification as deregulated gas if they wished. /19/ We do not renew the argument we made in the court of appeals that Section 101(b)(5) does not apply to dual-qualified regulated-deregulated gas. In addition to the court of appeals' dual-qualification holding, we also challenge the court's holding concerning the treatment of Section 107(c)(5) gas. The court did not treat that issue as a distinct one. We present the question separately (page I, supra), but it is closely related to the main question and warrants only brief discussion. See note 23, infra. /20/ The Conference Committee obviously adopted elements of both bills, bringing intrastate gas under control while "lengthening the period of time prior to the deregulation of most categories of natural gas" (H.R. Conf. Rep. 95-1752, supra, at 68). Representative Dingell, who was the floor manager of the Conference bill in the House, explained that, although he had opposed immediate deregulation for fear of its harsh consequences to consumers and potential for windfall profits, "(p)hased deregulation as set forth in the conference report avoids both of these objectionable results" (124 Cong. Rec. 38361 (1978)). On the compromise nature of the bill, see Allison, Natural Gas Pricing: The Eternal Debate, 37 Baylor L. Rev. 1, 37 (1985); Pierce, Natural Gas Regulation, Deregulation and Contracts, 68 Va. L. Rev. 63, 89 (1982); Moody & Garten, The Natural Gas Policy Act of 1978: Analysis and Overview, 25 Rocky Mtn. Min. L. Inst. 2-1, 2-39, 2-40 (1979); Lovett, supra, 16 Hous. L. Rev. at 1152. /21/ In our view, nothing in Section 503, which provides for administrative determinations of the proper category of natural gas, grants producers the indefeasible right to select one of two applicable categories. Indeed, the authority of the Commission to promulgate regulations under Sections 501(a) and (b) and 503(b) (15 U.S.C. 3411(a) and (b), 3413(b)) may well encompass the authority to implement the NGPA by directing that gas that in fact falls into a deregulated as well as regulated category be treated as deregulated. Such an action, moreover, would seem consistent with the concerns underlying the congressional floor statements quoted by the court of appeals, as discussed in text infra. /22/ If this Court reverses the Tenth Circuit's decision overturning the Commission's ruling that qualification under Section 107(c)(5) (15 U.S.C. 3317(c)(5)) automatically entails qualification under Section 102 or 103 (15 U.S.C. 3312, 3313), should be a rare case where gas that is qualified for regulated status has not also been qualified for a deregulated status for which it is eligible. Aside from Section 107(c)(5) gas, most of which the Commission's rule would automatically qualify for deregulated status, the only regulated gas that presents a significant potential problem of overlap with deregulated gas is stripper-well gas qualified under Section 108, 15 U.S.C. 3318. Almost all such gas that could qualify under Section 102 or 103, however, will already have been so qualified before the well's production diminished and the gas became eligible for Section 108 status. /23/ The court of appeals was faced with one narrow aspect of the issue of producer choice of qualification. The court overturned the Commission's ruling that "new tight formation" gas under Section 107(c)(5) (15 U.S.C. 3317(c)(5)), with a specified exception, is automatically qualified under Section 102 or 103 (15 U.S.C. 3312,3313) and hence deregulated. The court of appeals reached that decision in passing in the course of explaining its broader dual-qualification holding. This separate holding would have a significant impact on gas pricing and should be reversed. In addition to the Commission's general regulatory authority, which we think would support restrictions on producer category choice even in other contexts (see note 21, supra), there is clear authority for the Commission's ruling with respcet to Section 107(c)(5) gas. As the court of appeals appears to have recognized on petitions for rehearing (App., infra, 30a), the Commission is expressly authorized to establish the criteria for qualification as Section 107(c)(5) gas. The court of appeals did not disagree with the Commission's decision to base Section 107(c)(5) qualification on the same facts as are required to qualify for Section 102 or 103 status. It merely rejected the automatic dual qualification. The Commission's authority, however, surely encompasses this effort to simplify the qualification and regulatory process by ruling that Section 107(c)(5) natural gas that demonstrably meets all of the Section 102 or 103 criteria, based solely on the application for Section 107(c)(5) status, must be automatically so qualified. /24/ The court of appeals also cited (App., infra, 22a n.15) a statement in the Conference Report that "natural gas qualifying as gas produced from a natural gas stripper well (could be) sold subject to the provisions of sec. 108, rather than taking deregulated treatment as an existing intrastate contract" (H.R. Conf. Rep. 95-1752, supra, at 83). That statement, however, is not an explanation of Section 101(b)(5), but of a peculiar limitation on deregulation set by Section 121(e) (15 U.S.C. 3331(e)) for certain gas sold under intrastate contracts (NGPA Section 105, 15 U.S.C. 3315). Moreover, the statement is in fact addressed to an overlap of two regulated categories (Section 108, 15 U.S.C. 3318, and Section 105(b)(3), 15 U.S.C. 3315(b)(3)), not to the overlap of a regulated and a deregulated category. Indeed, the provision that the Conference Report statement explains, Section 121(e), supports the Commission's ruling here. In that provision, as in Section 101(b)(5), Congress addressed itself to dual-category gas; and Congress specifically provided that whenever the regulated category (Section 105(b)(3)) overlapped with a deregulated category (Sections 102, 103, 107(c)(1)-(4), 15 U.S.C. 3312, 3313, 3317(c)(1)-(4)), the deregulated category would be applicable. /25/ Indeed, as the Commission noted (see note 13, supra), several producers, including some of respondents here, argued in 1979 and 1980 that dual-qualified regulated-deregulated gas should be treated as deregulated irrespective of which price is higher. APPENDIX