FEDERAL ENERGY REGULATORY COMMISSION, PETITIONER V. INTERSTATE NATURAL GAS ASSOCIATION OF AMERICA, ET AL. No. 83-1173 In the Supreme Court of the United States October Term, 1983 The Solicitor General, on behalf of the Federal Energy Regulatory Commission, petitions for a writ of certiorari to review the judgment of the United States Court of Appeals for the District of Columbia Circuit in this case. Petition for a Writ of Certiorari to the United States Court of Appeals for the District of Columbia Circuit PARTIES TO THE PROCEEDING Federal Energy Regulatory Commission Associated Gas Distributors Interstate Natural Gas Association of America Michigan Wisconsin Pipeline Company Transcontinental Gas Pipe Line Company Natural Gas Pipeline Company of America Lone Star Gas Company Mississippi River Transmission Corp. Northern Natural Gas Company Texas Gas Transmission Corporation Valero Transmission Company Panhandle Eastern Pipe Line Company El Paso Natural Gas Company Laclede Gas Company Mobile Oil Corporation General American Oil Company of Texas Phillips Petroleum Company Pennzoil Company Shell Oil Company Exxon Corporation Getty Oil Company Louisiana Land and Exploration Company Conoco Inc. The Superior Oil Co. Texaco Inc. Tenneco Oil Company Houston Oil and Minerals Corp. Gulf Oil Corporation Placid Oil Company Aminoil, USA, Inc. Amoco Production Company Union Oil Company of California Sun Oil Company Arco Oil and Gas Company Chevron USA Sun Exploration and Production Co. Atlantic Richfield Company Public Service Commission of Wisconsin TABLE OF CONTENTS Opinions below Jurisdiction Statute and regulation involved Statement Reasons for granting the petition Conclusion Appendix A Appendix B Appendix C Appendix D Appendix E Appendix F Appendix G Appendix G OPINIONS BELOW The opinion of the court of appeals (App., infra, 1a-31a) is reported at 716 F.2d 1. The orders of the Federal Energy Regulatory Commission (App., infra, 32a-50a, 51a-86a, 87a-92a) are published at 45 Fed. Reg. 49077, 46 Fed. Reg. 24537, and 47 Fed. Reg. 614, respectively. JURISDICTION The judgment of the court of appeals (App., infra, 93a-98a) was entered on August 9, 1983. Petitions for rehearing were denied on October 19, 1983 (App., infra, 99a-100a). The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1) and 15 U.S.C. 3516(a)(4). STATUTE AND REGULATION INVOLVED The pertinent provisions of the Natural Gas Policy Act of 1978, 15 U.S.C. 3301 et seq., are set forth at App., infra, 101a-120a. The pertinent Commission regulation, 18 C.F.R. 270.204, is set forth at App., infra, 121a. QUESTION PRESENTED The Natural Gas Policy Act of 1978 (NGPA), 15 U.S.C. 3301 et seq., establishes maximum lawful prices -- expressed either in specific dollar figures, or by reference to preexisting prices, per million British thermal units (Btu's) -- for all "first sales" of natural gas delivered during any month, and authorizes the Federal Energy Regulatory Commission to issue rules defining technical and trade terms used in the Act. The question presented is whether the Commission's "Btu Rule" (18 C.F.R. 270.204(c)), which states that "(t)he maximum lawful price prescribed by the NGPA * * * for any first sale of natural gas applies to the Btu's actually delivered in that first sale," is consistent with that statutory mandate. STATEMENT This case involves the validity of a rule issued by the Federal Energy Regulatory Commission /1/ that specifies the methodology for determining the energy content of natural gas delivered in "first sales," for purposes of applying the maximum lawful price provisions of the Natural Gas Policy Act of 1978 (NGPA), 15 U.S.C. 3301 et seq. 1. The energy content of natural gas is measured in terms of British thermal units (Btu's). A Btu is generally understood to mean the amount of energy needed to raise the temperature of one pound of water one degree Fahrenheit. The Btu content of any given stream of natural gas will vary, depending on the particular mix of combustible and noncombustible constituents in the gas. In addition to combustible hydrocarbons, such as methane, natural gas often contains noncombustible substances, including water vapor. The water vapor capacity of any given natural gas stream is a function of the pressure and temperature to which the gas is subjected. Because water vapor has no available heat energy (i.e., it cannot be made to combine with oxygen and generate heat through combustion), its presence in any given volume of natural gas displaces energy-producing hydrocarbon molecules, thereby reducing the effective heating value, or Btu content, of the gas. App., infra, 6a, 75a-76a. 2. As a matter of historical practice in the industry, natural gas was traiditionally measured for pricing purposes according to volume, usually expressed in cents per thousand cubic foot units (Mcf's). /2/ Following this Court's decision in Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672 (1954), the Commission began to regulate producer sales of natural gas in interstate commerce pursuant to the Natural Gas Act, 15 U.S.C. 717 et seq. (NGA). /3/ Consistent with the traditional industry practice, the prices set by the Commission for wellhead gas sales were expressed volumetrically. For some years prior to the inception of Commission regulation of producer sales, many gas sales contracts had provided for adjustments to volume-based prices to reflect variations in the heating value of the gas. Those contracts generally provided for an increase (or decrease) in price to the extent the Btu content of the gas was above (or below) a given level. The Commission did not address the propriety of Btu adjustment provisions in gas sales contracts until 1961, when it announced, in a policy statement, that it would recognize such adjustment provisions in order to assure that gas of a minimum "pipeline quality" (i.e., gas containing not less than 1,000 Btu's per Mcf) would be delivered in interstate commerce. See 26 Fed. Reg. 4614-4615 (1961). In subsequent proceedings, the Commission permitted price adjustments to reflect the heat content of the gas. See Texaco, Inc., 33 F.P.C. 1228 (1965). See also Sunray DX Oil Co., 29 F,P.C. 1079, 1082-1083 (1963). Thereafter, when the Commission established area and nationwide ceiling prices for producer gas sales, it expressed those prices on a volumetric (per Mcf) basis, although it also generally continued to allow some Btu adjustments. See Area Rate Proceeding (Permian Basin Area), 34 F.P.C. 159, 223-224, 239, 240 (1965); Area Rate Proceeding (Southern Louisiana Area), 46 F.P.C. 86, 142-144 (1971); Just and Reasonable National Rates for Sales of Natural Gas, 52 F.P.C. 1604, 1650, 1651-1652 (1974); Just and Reasonable National Rates for Sales of Natural Gas, 54 F.P,C. 3090, 3123, 3124-3125 (1975); National Rates for Jurisdictional Sales of Natural Gas, 56 F.P.C. 2698, 2806, 2807-2808 (1976). As the Commission had noted in its initial policy statement, however, these adjustments to volume-based prices were for the sole purpose of providing an incentive for the input of high Btu gas that could be mixed with gas otherwise too low in Btu content for pipeline use (App., infra, 79a). See Texaco, Inc;, 33 F.P.C, at 1235. The Commission did not suggest that its recognition of Btu adjustments was intended precisely to correlate price and heat content. /4/ For purposes of quantifying heat content under this less than precise "quality adjustment" approach, the Commission, in most instances, adopted a standard of measurement that required a test volume of gas (one cubic foot) to be saturated with water vapot at certain prescribed temperature and pressure conditions (60 degrees F. and 30 inches of mercury). /5/ This method, which was based on the general industry practice of determining heat content under standard laboratory conditions, is known as the "wet" method "because it require(s) the gas sample to be saturated with water vapor at a temperature and pressure combination where the capacity of natural gas to absorb water vapor is markedly higher than that existing at the temperature and pressure conditions under which most natural gas is sold" (App., infra, 7a). At the defined standard conditions, gas fully saturated with water vapor will contain approximately 820 pounds of water vapor per million cubic feet (MMcf) of total gas, or approximately 1.74% of the total volume (id. at 77a, 78a). Under typical delivery conditions, on the other hand, the maximum amount of water vapor in the gas stream will range from 7 to 70 pounds per MMcf (App., infra, 78a n.2). /6/ Thus, it is common ground that the "wet" method "overstate(s) water vapor content for gas which, when actually delivered, (is) neither saturated with water vapor nor delivered at the 'standard' temperature or pressure. * * * This overstated water vapor content, in turn, cause(s) an understatement in the number of Btu's assumed to be in the test sample of natural gas" (id. at 7a; see id. at 78a). 3. As this Court recently observed, by enacting the NGPA, "Congress comprehensively and dramatically changed the method of pricing natural gas produced in the United States." Public Service Commission v. Mid-Louisiana Gas Co., No. 81-1889 (June 28, 1983), slip op. 1-2. In Title I of the NGPA, Congress fashioned a meticulously detailed scheme of maximum lawful prices for all "first sales" of natural gas delivered during any month. /7/ Title I "establishes an exhaustive categorization of natural gas production, and sets forth a methodology for calculating an appropriate ceiling price within each category." Mid-Louisiana, slip op, 12. The incentive price for each category of gas is stated either in terms of a specific dollar figure per million Btu's, or by reference to a previously existing price, also expressed on a per million Btu basis. Although Congress provided detailed definitions of the various terms used in the NGPA, it defined "Btu" simply as "British thermal unit." 15 U.S.C. 3301(30). In another part of the NGPA, however, Congress authorized the Commission to administer the Act, "to prescribe * * * such rules and orders as it may find necessary or appropriate to carry out its functions under (the Act)" (15 U.S,C. 3411(a)), and, more specifically, "to define, by rule, accounting, technical, and trade terms used in (the Act)" (15 U.S.C. 3411(b)). In Order No. 93, the initial order under review (App., infra, 33a-50a), the Commission issued a final rule (18 C.F.R. 270.204) that describes the "wet" method for determining the Btu content of gas sold under the NGPA (see App., infra, 50a). The Commission noted in its order, however, that the results obtained under standard test conditions "must be converted to figures that reflect the actual condition of the gas on delivery in order to properly price the gas" (id. at 43a). In Order No. 93-A, the Commission denied rehearing of its initial order (App., infra, 51a-86a). The Commission noted that Congress in the NGPA "chose to establish energy-referenced prices (dollars per MMBtu) as opposed to volume-referenced prices (dollars per Mcf) * * * (and) left implementation of energy-referenced pricing * * * to the Commission" (id. at 59a). Because the "wet" method understates the heating value of gas at actual delivery conditions, the Commission reasoned that accurate pricing under the NGPA "can only be achieved by applying the prescribed maximum lawful price to the number of MMBtu's in a volume of gas at delivery conditions rather than to some theoretical quantity such as the number of MMBtu's at standard conditions" (id. at 63a; see also id. at 78a-79a). /8/ The Commission observed that, under the NGA, "heating value was an arbitrarily-derived numerical factor used to make a quality adjustment to the volume-referenced price," whereas in "the NGPA energy-referenced 'ceiling prices' * * * heating value is the price determinant" (id. at 66a). Accordingly, the Commission concluded (id. at 82a-83a): If gas is now to be priced on the basis of the heating energy actually delivered to a buyer, the former NGA adjustment procedures with respect to heating value are not technically correct for use in the energy-referenced pricing scheme. * * * They made sense for quality control purposes and for encouraging the delivery of high Btu gas. * * * Whatever previous usefulness may have derived for producer ratemaking purposes from the Btu adjustment procedures no longer exists. The procedures have now become a "vestigial organ" and are not an integral component of the NGPA pricing anatomy. In a subsequent order (App., infra, 87a-92a), the Commission added a clarifying amendment to 18 C.F.R. 270.204, which states: (c) * * * The maximum lawful price prescribed by the NGPA and this part for any first sale of natural gas applies to the Btu's actually delivered in that first sale. 4. The court of appeals vacated the Commission's rule (App., infra, 1a-31a). The court observed that "(t)he NGPA does not expressly provide for either a 'wet' or a 'dry' determination of Btu content" (id. at 19a) /9/ and that "there are no indications in the NGPA's legislative history to suggest that Congress' failure to define expressly Btu content indicates, by itself, a conscious policy preference for either the 'wet' or the 'dry' rule" (id. at 20a). The court nevertheless concluded that "it is most logical * * * to assume that Congress fixed (the NGPA) prices based on the 'wet' method of measuring Btu's (id. at 23a). In reaching this conclusion, the court expressed the view that the "wet" method was "the only method of measuring Btu's with which Congress was likely to have been familiar" when it enacted the NGPA (id. at 24a), and it pointed to certain references in the legislative history as "indicat(ing) at least indirect congressional incorporation of the wet rule into the NGPA's price structure" (id. at 25a). In addition, the court referred to "the likelihood" (id. at 26a) that Congress "may have assumed the 'Mcf' and 'MMBtu' commodity units to be, in many respects, equivalent" (id. at 25a). The court thus found the Commission's rule "to be inconsistent with the NGPA's language, structure, and legislative history" (id. at 29a) and "fundamentally at odds with the Btu measurement technique implicit in the NGPA" (id. at 30a). /10/ REASONS FOR GRANTING THE PETITION This case presents a question of fundamental importance to the proper implementation of the incentive pricing provisions of the NGPA. Under Title I of the NGPA, any natural gas delivered in a first sale is subject to the applicable maximum lawful price, which is expressed on a "per million Btu" basis. It thus is clear that ascertaining the precise Btu content of gas involved in a particular first sale is essential in order to price that gas under the NGPA. In the orders at issue, the Commission ruled that Congress, by authorizing the collection of ceiling rates for each MMBtu delivered, intended that Btu content be measured for pricing purposes on an accurate, "as delivered" basis. The court of appeals, however, disregarded the Commission's reasonable construction of the statute it is charged with administering, and held that Congress implicitly incorporated into the NGPA a concededly inaccurate measurement rule that significantly understates the Btu content of gas delivered in a first sale. Thus, the court has held, not only that the Commission's rule is not mandated by the NGPA, but that the NGPA absolutely bars the Commission from issuing the rule as a matter of its discretion in implementing the Act. The former holding effectively disregards the settled rule of judicial deference to a reasonable agency construction of its own statute, and the latter holding is directly at odds with the express delegation of authority to the Commission to define technical terms used in the statute. Moreover, unless overturned, the decision below would have a substantial impact on revenues collected by natural gas producers in the United States. There is a potential difference of approximately 1.74% in the ceiling prices producers may collect under the court's decision and the Commission's rule. Although the financial impact of the decision cannot be precisely determined, the Commission estimates that, for the period between December 1, 1978 (the effective date of the Btu Rule) and the present, the amounts at stake are well in excess of $1 billion. Accordingly, we submit that review by this Court is clearly warranted. 1. The court of appeals should have deferred to the Commission's reasonable construction of the NGPA. As noted, the NGPA comprehensively altered the method of pricing natural gas produced in the United States. Prior to the NGPA, a dual pricing system existed, in which the rates for interstate producer sales of gas were regulated by the Commission on the basis of volume under the NGA's "just and reasonable" standard, and the rates for intrastate sales were not subject to federal regulation at all but instead were essentially left to the contracting parties. Under the NGPA, all first sales of natural gas, which include virtually all producer sales, are subject to the maximum lawful pricing scheme established in Title I of the Act. The NGPA's ceiling prices are stated, not within broad ranges, but either in precise dollars-and-cents terms "per MMBtu", or by reference to pre-existing rates, also expressed on a "per MMBtu" basis. /11/ The plain language of the NGPA thus reflects Congress's clear intent to establish a system of exact ceiling prices, based on heating value (or Btu content), with respect to all gas delivered in first sales. Accordingly, the Commission reasonably concluded that proper implementation of the NGPA's pricing scheme requires an accurate determination of the Btu content of such gas. Because the "wet" method overstates the amount of water vapor in a given gas stream and thereby understates the heating value of the gas, the Commission's rule provides that Btu content must be determined on an "as delivered" basis. This rule, which permits the collection of ceiling prices for each MMBtu actually delivered, is wholly consistent with the intent of Congress in enacting the NGPA. /12/ It is well settled that courts are required to account "great deference" to the interpretation given a statute by the agency charged with its administration. Udall v. Tallman, 380 U.S. 1, 16 (1965). As the court recently reiterated, this respect is particularly due where, as here, a court is called upon to review an agency rule that represents "a contemporaneous construction of a statute by the men charged with the responsibility of setting its machinery in motion, of making the parts work efficiently and smoothly while they are yet untried and new." Udall v. Tallman, 380 U.S. 1, 16 (1965), quoting Power Reactor Development Co. v. International Union of Electrical, Radio & Machine Workers, 367 U.S. 396, 408 (1961). To uphold it, "we need not find that (FERC's) construction is the only reasonable one, or even that it is the result we would have reached had the question arisen in the first instance in judicial proceedings;" Unemployment Compensation Comm'n v. Aragon, 329 U.S. 143, 153 (1946). See Mourning v. Family Publications Service, 411 U.S. 356, 371-372 (1973). We need only conclude that it is a reasonable interpretation of the relevant provisions. American Paper Institute, Inc. v. American Electric Power Service Corp., No. 82-34 (May 16, 1983), slip op. 19-20 (emphasis in original). See FEC v. Democratic Senatorial Campaign Committee, 454 U.S. 27, 39 (1981). Although the court of appeals paid lip service to these established principles (App., infra, 18a-19a), it erred by failing to accord the proper degree of dererence to the Commission's interpretation of the NGPA, which, as we have shown, is reasonable and fully consistent with the statutory purpose. Moreover, the court of appeals' own interpretation, which attributes to Congress the intent to codify a Btu measurement technique that significantly understates the Btu content of natural gas, is itself unreasonable. Despite the court's determination that Congress neither expressly nor by silence made "a conscious policy preference for either the 'wet' or the 'dry' rule" (App., infra, 20a), it nonetheless concluded that Congress's choice of the "wet" method was "implicit" in the NGPA. Even apart from the inherent illogic of this conclusion, the reasons submitted to support it do not withstand analysis. According to the court of appeals, the "wet" technique was the only method of determining Btu content "with which Congress was likely to have been familiar" (App., infra, 24a). This is pure surmise. But, in any event, the question here is not whether Congress is likely to have been familiar with one or another method of measuring Btu content; even if Congress was familiar only with the "wet" method, it does not follow that Congress meant to codify that technique in the statute. The legislative history cited by the court of appeals provides no support for its conclusion. The court relied heavily on language in a House Report on a bill (H.R. 8444, 95th Cong., 1st Sess. (1977)) that concededly was different in many respects from the NGPA as ultimately enacted (App., infra, 24a). Section 405 of the bill would have established a maximum lawful price for any first sale of old natural gas produced in the United States and sold under an existing contract. For sales of gas subject to the Commission's NGA jurisdiction, the maximum lawful price would have been the applicable contract price on April 20, 1977 that had been determined by the Commission to be just and reasonable, multiplied by an inflation adjustment. See H.R. Rep. 95-496 (Pt. 4), 95th Cong., 1st Sess. 104 (1977). For price would have been "the contract price, including any nonjurisdictional (i.e. intrastate) sales, the ceiling contractually authorized quality adjustments, applicable on April 20, 1977, multiplied by the inflation adjustment." Ibid. In the sentence cited by the court, the Committee explained (H.R. Rep. 95-496, supra, at 103): The reference to FPC-determined just and reasonable prices and contract prices for purposes of determining maximum lawful prices under section 405 incorporates Btu adjustments and other quality adjustments provided for in FPC rate determinations or in the applicable contract. Although the reference to Btu adjustments in "FPC rate determinations" might constitute a tangential acknowledgment of the "wet" method, the reference to quality adjustments in the "applicable contract" might just as likely constitute a tangential acknowledgement of the "as delivered" method of determining Btu content, since many intrastate contracts provided for adjustment on the basis of Btu's actually delivered. Certainly, nothing in the above language reflects "implicit" adoption of the "wet" method for NGPA pricing purposes. The only other portion of the legislative history relied on by the court to support its theory of "implicit" codification of the "wet" rule is the Conference Report's discussion of NGPA Sections 104, 106(a), and 109 (15 U.S.C. 3314, 3316(a), and 3319), which refers to "'the just and reasonable rates that were in effect on April 20, 1977, as converted, if necessary, to a million Btu basis" (App., infra, 24a, quoting H.R. Conf. Rep. 95-1752, 95th Cong., 2d Sess. 82 (1978) (court's emphasis)). According to the court, the above-quoted language means that it would be unnecessary to convert any NGA prices that had already been expressed (through "wet" Btu adjustments) on a "per million Btu" basis under the method of determination in force under the NGA (App., infra, 24a-25a). This analysis fails on several grounds. To begin with, the court overlooked the fact that, prior to the NGPA, the Commission consistently had expressed the applicable NGA rates on a "per Mcf" basis, with allowance for a Btu adjustment, not on a "per MMBtu" basis. Moreover, although the court held that the NGPA's "implicit" codification of the "wet" method was applicable to all of the wellhead pricing provisions of the NGPA, the court failed to explain how the above-quoted language supports this codification with regard to those pricing provisions that make no reference to NGA just and reasonable rates. See, e.g., Sections 102, 105 and 108 of the NGPA, 15 U.S.C. 3312, 3315 and 3318. More importantly, the Conference Report makes it clear that it is for the Commission, the agency charged with administering the statute, to determine when conversion to a million Btu basis is necessary. Thus, the quoted phrase is more reasonably read -- as the Commission read it in this case (App., infra, 59a-60a) -- as an enlargement, not a restriction on its authority. The court of appeals also sought to support its interpretation by asserting that the Commission "overstat(ed) the significance of Congress' shift to the MMBtu basis of pricing * * * " (App., infra, 25a). In the court's view, "there is considerable evidence that Congress may have assumed the 'Mcf' and 'MMBtu' commodity units to be, in many respects, equivalent" (ibid.). /13/ This analysis is also flawed. If Congress had intended "Btu" and "Mcf" to be interchangeable, there would have been no reason to refer to Btu's at all, or to distinguish between the two units. On the contrary, however, the two terms have different meanings and are separately defined in the NGPA. See 15 U.S.C. 3301(29) and (30). /14/ More importantly for present purposes, "MMBtu" and "Mcf" are both used precisely throughout the NGPA to designate distinct concepts; the former term is used exclusively when the statute deals with pricing and the latter term is used when the statute deals with volumetric measurement. For example, in Section 108(a) of the NGPA, 15 U.S.C, 3318(a), the maximum lawful price for stripper well gas is expressed as $2.09 per million Btu's as of May 1978; however, in defining stripper well gas, Section 108(b), 15 U.S.C. 3318(b), expressed the volumetric cut-off as 60 Mcf per day during a particular production period. This distinction demonsrates, not that Congress considered Mcf's and MMBtu's to be equivalent for pricing purposes, but rather that Congress in the NGPA made a painstaking effort to assure that the heat content of gas would be the controlling factor in determining price. The principal defect underlying the court of appeals' analysis is its failure to recognize that the purpose of the Btu adjustments, permitted by the Commission in the exercise of its discretion under the NGA, was not to correlate price precisely with the heating value of the gas. Instead, the purpose was to maximize the Btu content of gas flowing in interstate commerce in a manner that would be least disruptive of existing industry practice. It was not essential for this purpose that the method adopted for measuring Btu content exactly reflect the amount of Btu's actually delivered; the adjustment mechanism was satisfactory so long as it offered producers some incentive to maximize the Btu content of interstate gas. See Texaco, Inc., 33 F.P.C. at 1235. As the inaccurate "wet" method is not adequate to the very different task of ascertaining the precise Btu content of gas for NGPA pricing purposes. There is no reason to believe that Congress thought otherwise. In addition, the court of appeals ignored the fact that the Commission's method of regulating interstate producer sales under the National Gas Act had no application at all to intrastate sales, which came under Commission regulation for the first time with the enactment of the NGPA. /15/ Thus, to the extent that many intrastate sales were made, and are now made, on the basis of Btu content as measured under actual delivery conditions, the court's ruling that the "wet" method is "implicit" in the NGPA could require intrastate producers to change their traditional mode of determining Btu content. As a consequence, any intrastate producer selling gas at the maximum lawful price under the accurate "as delivered" method of measurement would be forced to adopt the inaccurate "wet" method and thus effectively receive less than the maximum price even if that price were prescribed by contract. Congress clearly did not contemplate such a result. See pages 14-15, supra. 3. Finally, the court of appeals seriously erred in concluding that Congress meant to preclude the Commission from adopting an accurate, "as delivered" rule for determining Btu content. Even assuming that the "as delivered" rule was not mandated by the NGPA, we submit that, at the very least, Congress left the matter to the ultimate discretion of the Commission. This conclusion is consistent with the language and legislative history of the NGPA. /16/ As noted, Congress defined "Btu" simply as a "British thermal unit," without expressing delineating the appropriate methodology for determining Btu content. Congress, however, also delegated to the Commission broad rulemaking authority in administering the NGPA and specifically authorized the Commission to define technical terms used in the Act. 15 U.S.C. 3411(a) and (b). Moreover, the conferees explained that, in exercising the latter authority, the Commission may "refine definitions of terms provided in the Act in a manner that is consistent with the definitions provided." H.R. Conf. Rep. 95-1752, supra, at 69. Given this background, the conclusion is inescapable that, to the extent that Congress did not affirmatively require Btu's to be measured "as delivered," Congress structured the NGPA in such a manner as to achieve its primary goal -- establishing incentive ceiling prices per MMBtu -- while lleaving to the Commission the responsibility for filling in the technical details necessary to implement that pricing scheme. See American Trucking Associations, Inc. v. United States, 344 U.S. 298, 309-310 (1953). Absent a finding that the Commission's action in issuing the Btu Rule was arbitrary, capricious, or an abuse of discretion -- a finding that the court of appeals did not even attempt to make -- the court was without authority to overturn the Commission's rule. See American Paper Institute, Inc. v. American Electric Power Service Corp., slip op. 10; Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 416 (1971). CONCLUSION The petition for a writ of certiorari should be granted. Respectfully submitted, REX E. LEE Solicitor General LOUIS F. CLAIBORNE Deputy Solicitor General ELLIOTT SCHULDER Assistant to the Solicitor General STEPHEN R. MELTON Acting General Counsel JEROME M. FEIT Solicitor JOEL M. COCKRELL Attorney Federal Energy Regulatory Commission JANUARY 1984 /1/ Both the Federal Energy Regulatory Commission and its predecessor agency, the Federal Power Commission, are referred to herein as the "Commission." /2/ In most natural gas transactions between producers and pipelines, gas is measured through an "orifice meter," which uses accepted principles of physics and chemistry to arrive at a standardized determination of the number of volume units delivered in a given time period (e.g., Mcf's per day). American Gas Association Measurement Manual 40 (1963). /3/ Intrastate producer sales of natural gas did not come under federal regulation until the passage of the NGPA. /4/ Indeed, many of the early area rates provided no Btu adjustment for gas with a Btu content of between 1,000 and 1,050 Btu's per Mcf (App., infra, 80a n.4). See, e.g., Area Rate Proceeding (Permian Basin Area), 34 F.P.C. at 223. In addition, in some instances, small producers were exempted from quality adjustments on the de minimis principle; the Commission found that the burden and expense involved in the calculations would in most cases exceed the amount of the adjustment. See id. at 225. /5/ See Texaco, Inc., 33 F.P.C. at 1238. See also 18 C.F.R. 2.56a(c)(1), 2.56b(d)(1). /6/ Indeed, gas sales contracts often provide that gas delivered to a pipeline is to contain only seven pounds of water per MMcf (App., infra, 67a n.17, 77a-78a). See also 18 C.F.R. 154.109(e)(2)(i) (Area Rates -- Texas Gulf Coast Area); 18 C.F.R. 154.109a(d)(2)(i) (Area Rates -- Other Southwest Area). /7/ The term "first sale" is defined in the NGPA to include any sale of any volume of natural gas to a pipeline or local distribution company. 15 U.S.C. 3301(21). The term "deliver," when used with respect to any first sale of natural gas, is generally defined in the NGPA as "the physical delivery from the seller." 15 U.S.C. 3301(22). In addition, the statute provides that the maximum lawful ceiling prices "shall apply to the month of delivery without regard to the date of the sale or the date of the contract under which the sale occurs(.)" 15 U.S.C. 3311(b)(4)(B). /8/ The Commission explained that its implementation of the NGPA incentive pricing scheme so as to price heating value on an "as delivered" basis is basically consistent with its pricing of producer sales under the NGA. Thus, "(a)lthough the commodity priced (under the NGA) was volume rather than heating value," the Commission noted that it had "priced the commodity on an as-delivered basis" (App., infra, 61a). /9/ The court of appeals referred to the rule at issue here as the "dry rule" because the court recognized that "natural gas generally contains far less water vapor under actual delivery conditions than under the saturated, laboratory conditions specified in the wet rule" (App., infra, 10a). However, it would be more accurate to refer to the Commission's rule as an "as delivered" rule, since it "measure(s) the Btu content of gas at the conditions under which natural gas is actually delivered for first sales" (ibid.) /10/ In rejecting the Commission's interpretation of the NGPA, the court of appeals noted that "(t)he Commission's technical experience with measuring Btu's is of limited usefulness in determining what Congress meant in setting ceiling prices for natural gas on a Btu basis. Unlike those situations in which Congress delegates to an agency the choice of methodologies or definitions, * * * the Commission itself concedes that it was given "no independent authority under the NGPA to define "Btu,"' Brief for Respondent FERC at 28 n.28" (App., infra, 29a-30a). The court's reference was to footnote in the Commission's brief in which the Commission, replying to respondents' arguments concerning alleged procedural defects in the promulgation of the Btu Rule, contended that the rule should be applied retroactively to the effective date of the NGPA because it was interpretive rather than legislative in effect. In its petition for rehearing en bach, the Commission argued that, even if the NGPA did not compel adoption of the Btu Rule, "Congress left the matter to the ultimate discretion of the Commission" (FERC Pet. for Rehearing at 14). /11/ As this Court recently observed, under the NGPA's incentive pricing scheme, the Commission is authorized to raise the ceiling price in certain circumstances, but is "given (no) authority to require a rate lower than the statutory ceiling." Mid-Louisiana, slip op. 13. /12/ That the Commission's rule accords with the intent of Congress is aptly demonstrated by the following example. Assume that the NGPA maximum lawful price for a category of natural gas is $3.00 per MMBtu and a sale is made of 100 MMBtu's. The clear intent of the statute is to permit the seller to receive up to $3.00 for each MMBtu actually sold. The seller, under the Commission's "as delivered" method, can receive up to $3.00 for each MMBtu sold, or in this example $300. By contrast, the "wet" method assumes that 1.74% of a given stream of natural gas is comprised of water vapor at the time of delivery (containing 820 pounds of water per one million cubic feet) when, in the typical case the gas is almost "dry" (containing 7 pounds of water per one million cubic feet). Thus, depending upon how one characterizes the court's decision, the seller in the above example would either (a) fictionally deliver only 98.26 MMBtu's at $3.00 each; (b) deliver 100 MMBtu's but sell only 98.26 MMBtu's at $3.00 each with the remaining 1.74 MMBtu's included as a free bonus; or (c) deliver and sell 100 MMBtu's at a lower maximum lawful price of $2.9478 per MMBtu (98,26 MMBtu's x $3.00). However characterized, this result runs directly contrary to the central goal of the wellhead pricing provisions of the NGPA: that a seller may receive up to a precisely set maximum lawful price for each MMBtu it sells. /13/ The court of appeals' belief that Congress may have considered "Mcf" and "MMBtu" to be equivalent is inconsistent with the court's surmise that Congress may have been familiar with the "wet" method. Certainly, if Congress had been familiar with the "wet" method, it would have known that "Mcf" and "MMBtu" were not equivalent. /14/ As already noted, "Btu" refers to heating value. On the other hand, "Mcf" means 1,000 cubic feet of natural gas measured at a pressure of 14.73 pounds per square inch absolute and a temperature of 60 degrees Fahrenheit. 15 U.S.C. 3301(29). The two terms are quite different. "Mcf" is utilized to express the volume of natural gas without regard to its chemical composition and heating value. On the other hand, heating value, which is expressed in Btu's, is determined by the chemical composition of the gas and reflects its economic value. /15/ At the present time, there are in excess of 100 intrastate natural gas pipelines in the United States. Between 1978 and 1982, these pipelines accounted for approximately 40% of the natural gas produced and sold in this country. DOE/EIA, U.S. Crude Oil, Natural Gas, and Natural Gas Liquid Reserves, 1982 Annual Report, EIA Form 23, at 5 (Aug. 1983); DOE/EIA, Gas Suppliers of Interstate Natural Gas Pipeline Companies, 1982, FERC Form 15, at 10 (Oct. 1983). /16/ The conclusion is also consistent with the views expressed by the Commission in support of its issuance of the "Btu Rule" (see App., infra, 59a-60a). APPENDIX Appendix material is not available on juris