The Supreme Court today allowed the states a greater role in regulating the energy sector. In ONEOK, the Court held that states can regulate activities that affect both wholesale and retail transactions to the extent that the regulations do not conflict with Federal Energy Regulatory Commission (FERC) regulations. In so doing, wide swaths of conduct continue to be subject to both state energy regulations and generally applicable state laws. While the ruling ensures retail customers a remedy for business practices that are proscribed by state law, it may also subject conduct otherwise permitted by FERC to civil liability if that conduct affects retail transactions. This decision may also hold implications for similar regulatory regimes, such as the Federal Power Act (FPA).

The Supreme Court today upheld a lower court decision that allowed a greater role for state courts in regulating the energy sector. Specifically, in ONEOK, Inc. v. Learjet, Inc.,[1] the Court held that state laws may apply to conduct that affects both wholesale and retail transactions provided those laws do not conflict with FERC regulations. In so doing, the Court rejected a bid by FERC and natural gas wholesalers to exempt from all state regulation activities that affect both types of sales.

The dispute in ONEOK arose out of the division of jurisdiction created by Congress in the Natural Gas Act (NGA).[2] The NGA grants FERC exclusive jurisdiction to regulate interstate transport of natural gas, wholesale natural gas transactions, and “practices” that directly affect wholesale distribution. The power to regulate retail transactions was left to the states. At issue in ONEOK is whether an activity that affects both wholesale and retail sales is absolutely shielded from all state regulation, even when the activity affects retail transactions and the state regulation does not conflict with FERC’s regulations.

In the underlying suits, plaintiffs alleged that natural gas traders engaged in anticompetitive behavior by reporting false information to the price indices to which contract prices were tied and by conducting wash sales to artificially inflate perceived demand. The activities affected both wholesale and retail transactions. The plaintiffs brought various claims in various state and federal courts beginning in 2005. These cases were eventually consolidated into ONEOK. In July 2011, the District Court dismissed the claims, holding that the NGA preempted all state attempts to regulate such activity regardless of whether regulations conflict with federal regulations. It thus held that FERC alone had the power to regulate practices that directly affect wholesale prices, even when the activity also “directly affected” retail sales. The district court reasoned that because the activity directly affected wholesale transactions, Section 5(a)’s grant of jurisdiction over practices to FERC meant that FERC occupied the field, just as it does when directly regulating wholesale transactions themselves.

In April 2013, the 9th Circuit reversed[3] reasoning that such broad preemption would disrupt the division of regulatory jurisdiction struck by Congress in Section 1(b), which explicitly reserves for states power over retail natural gas sales. According to the Court of Appeals, Section 1(b) of the NGA distinguishes sharply between “sales for resale and direct sales for consumptive uses.” In an effort to give effect to this division, the 9th Circuit construed the preemptive effects narrowly, lest Section 5(a) “nullif[y] the jurisdictional provisions of Section 1(b).”

A divided Supreme Court today sided with the 9th Circuit and several states that urged the Court to let them continue regulating conduct that affects retail sales. The Court focused on “the target at which the state law aims in determining whether that law is pre-empted.” After analyzing the broadly applicable nature of state antitrust laws and noting that the lawsuits were directed at practice affecting retail rates, which are “firmly on the states’ side” of the jurisdictional division, it concluded they were not preempted.

In holding that FERC does not have exclusive jurisdiction over activities that affect both retail and wholesale transactions, the Supreme Court subjects practices that affect wholesale transactions to state regulation if they also affect retail transactions and the state regulation does not conflict with FERC’s regulations. In so doing, wide swaths of conduct continue to be subject to both state regulations targeted at regulating the natural gas industry and generally applicable state laws. As a result, general common law and statutory duties rooted in state law such as prohibitions on unfair practices and the duty to refrain from fraudulent statements, continue to apply to all activities that affect retail transactions.

Although today’s ruling ensures retail customers a remedy for business practices that are proscribed by state law, it may also subject otherwise permissible wholesale conduct to civil liability to the extent the conduct also affects retail transactions. As a result, entities engaged in interstate transportation and wholesale transactions may be subject to a patchwork of state regulations and laws.

This ruling also holds implications for similar statutes such as the Federal Power Act (FPA). Similar to the NGA, the FPA sharply distinguishes between wholesale and interstate transmission, on the one hand, and retail sales, on the other.[4] Although the ultimate effect of ONEOK remains to be seen, any federal regulatory scheme that explicitly carves out space for state regulation may be affected by ONEOK’s holding.