Preemption Argument Runs Out Of Steam As Ninth Circuit Revives Natural Gas Case

The U.S. Court of Appeals for the Ninth Circuit has revived plaintiffs’ state antitrust claims in In re: Western States Wholesale Natural Gas Litigation, finding that federal regulation of the interstate natural gas market does not preempt state antitrust law claims that energy companies manipulated intrastate transactions.

The Ninth Circuit ruled that Congress intended its amendments to the Natural Gas Act to provide states with the flexibility to regulate the industry – not to preempt such efforts.  Under the law, the federal government can regulate only transportation of natural gas between states, interstate natural gas wholesales, and the energy companies involved in interstate transport or wholesales.

The case arose out of claims that the defendants violated antitrust laws by manipulating the natural gas market and selling natural gas at artificially high prices, leading to the energy crisis of 2000-2002.  These claims were based on admissions by energy companies that their employees reported false data to price index publications.  Buyers and sellers rely on these price indices to set the actual market price for natural gas.  The energy traders also allegedly engaged in “wash sales,” which are prearranged trades involving a sale and a purchase for equal volumes.  Plaintiffs claim the price manipulation limited competition and violated antitrust laws.

Defendants sought to dismiss state antitrust law claims by arguing that such state law claims were preempted by the Natural Gas Act, which gives the Federal Energy Regulatory Commission (“FERC”) the power to set wholesale prices.  The U.S. District Court for the District of Nevada agreed and dismissed the claims.

The Ninth Circuit’s opinion rejected the district court’s analysis of the Natural Gas Act by distinguishing between prices under FERC’s jurisdiction and ones outside its jurisdiction.

The price index publications compile prices across the natural gas industry and include not only prices for interstate transactions – which are regulated by the federal government – but also transactions that occur in a single state.  The court held that the NGA does not preempt plaintiffs’ state antitrust claims because they arise out of price manipulation associated with intrastate transactions falling outside of the FERC’s jurisdiction.