The Primary Federal Constitutional Constraints on Louisiana Actions

The U.S. Constitution contains two major sources of limitations on Louisiana's power to increase the amount of gas sold at reasonable prices in the intrastate market - the Commerce Clause and the Supremacy Clause.

A. Commerce Clause Constraints

Last year, in New England Power Co. v. New Hampshire, ⁵ the U.S. Supreme Court had occasion to explain the nature of the Commerce Clause limit on state power to keep a natural resource within its borders. In a brief unanimous opinion, the U.S. Supreme Court struck down a New Hampshire statute purporting to limit the exportation to other states of hydroelectric power generated in New Hampshire. Citing a series of cases spanning the past eighty years, the Court held that the New Hampshire Statute violated the Commerce Clause. It stated the principle it applied as follows:

Our cases consistently have held that the Commerce Clause of the constitution ... precludes a State from mandating that its residents be given a preferred right of access, over out-of-state consumers, to natural resources located within its borders or to the products derived therefrom. ... Only recently, ...we reiterated that "these cases stand for the basic principle that a state is without power to prevent privately owned articles of trade from being shipped and sold in interstate commerce on the ground that they are required to satisfy local demands or because they are needed by the people of the state." ⁶

Thus, the Commerce Clause precludes Louisiana from taking many of the actions that would most obviously aid the intrastate market. The case law interpreting the Commerce Clause provides two possible vehicles for sustaining some forms of state action more modest than a statute giving the intrastate market preferred access to all gas produced in Louisiana - (1) the exception to the Commerce Clause applicable to goods manufactured and sold by a state, and (2) even handed exercises of state police power that have only incidental effects on interstate commerce.

1. The State Participant in Market Exception

The state manufactured and sold goods exception to the Commerce Clause limitations on state power to prefer its citizens was the subject of the Supreme Court's 1980 opinion in Reeves, Inc. v. Stake. ⁷ South Dakota had operated a cement plant for over fifty years. The plant traditionally sold to both South Dakota companies and out-of-state companies. In 1978, there was a cement shortage, and the state began selling cement preferentially to South Dakota companies, leaving out-of-state companies far short of their requirements for cement. The out-of-state companies argued that South Dakota's action violated the Commerce Clause.

In a five to four decision, the Court held that South Dakota's action did not violate the Commerce Clause. The majority conceded that the state action would violate the Commerce Clause if the Commerce Clause applied, but it held that the Commerce Clause does not apply to actions taken by a state in its capacity as a market participant rather than a market regulator. The majority reasoned that, just as a private manufacturer and seller has the power to choose its customers, so should a state when it assumes the role of private manufacturer.

The majority in Reeves attached a number of important qualifications to its holding, however. First, it pointed out that Congress has the power to control state participation in a market. Thus, state participation is limited by the antitrust laws and federal regulatory statutes.

Second, it pointed out that the state in Reeves was not trying to exercise its powers as a bare holder of title to a good, but as the actual manufacturer of the good.⁸ If referred to its 1979 opinion in Hughes v. Oklahoma,⁹ in which it held that bare state title to something that later becomes a good in commerce is not sufficient to justify a state in restricting transportation, sale, or use of the good out-of-state. In Hughes, the Court held unconstitutional an Oklahoma statute purporting to forbid exportation from Oklahoma of minnows caught in Oklahoma. The state had attempted to defend the statute as a valid exercise of its power as the "owner" of all wild creatures in Oklahoma. This qualification suggests that the Court might not extend the holding in Reeves to gas originating from state leases because the state's role is only that of the original owner rather than the manufacturer.

Third, the majority in Reeves emphasized that:

Cement is not a natural resource, like coal, timber, wild game or minerals .... It is the end product of a complex process whereby a costly physical plant and human labor act on raw materials. South Dakota has not sought to limit access to the State's limestone or other materials used to make cement ..... Whatever limits might exist on a State's ability to invoke the Alexandria Scrap exemption to hoard resources which by happenstance are found there, those limits do not apply here.¹⁰

This suggests that the Court might not extend the Reeves holding to gas produced from state leases because gas is a natural resource rather than a manufactured good.

Finally, the Court noted that South Dakota did not attempt to prohibit resale of its cement to out-of-state users; it only favored in-state residents in the initial sale.¹¹ This suggests that the Court might not extend Reeves to state lease provisions purporting to limit the lesee's power to sell gas out-of-state.

The potential significance of the majority's many qualifications of Reeves is impossible to predict. However, those qualifications provide the Court at least three different bases for distinguishing a Louisiana statute (or lease) giving intrastate pipelines or consumers preferential access to gas produced from state lands. Since Reeves itself was a five-to-four decision, I am not confident that the Reeves exception to the Commerce Clause constraints on state action would be held to apply to a Louisiana program providing Louisiana consumers preferential access to gas produced from state lands.

2. The Incidental Effect on Interstate Commerce Exception

The second method of avoiding the Commerce Clause prohibition on state actions is through a facially neutral exercise of state police power that has only incidental effects on interstate commerce. The Court consistently has recognized that a state's legitimate interests may justify imposition of requirements that have some adverse effects on interstate commerce. Two recent cases illustrate the Court's approach to state actions that arguably have only an incidental effect on interstate commerce.

In Hughes v. Oklahoma, the court said:

Under that general rule, we must inquire (1) whether the challenged statute regulates evenhandedly with only "incidental" effects on interstate commerce, or discriminates against interstate commerce either on its face or in its practical effect; (2) whether the statute serves a legitimate local purpose; and, if so, (3) whether alternatuve means could promote this local purpose as well without discriminating against interstate commerce.¹²

Similarly, in Sporhase v. Nebraska, the Court stated the rule as follows:

"Where the statute regulates evenhandedly to effectuate a legitimate local public interest, and its effects on interstate commerce are only incidental, it will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits. If a legitimate local purpose is found, then the question becomes one of degree. And the extent of the burden that will be tolerated will of course depend on the nature of the local interest involved, and on whether it could be promoted as well with a lesser impact on interstate activities." ¹³

These tests permit a host of facially neutral state actions with effects on interstate commerce, such as laws on licensing, inspection, conservation, etc.

In Tenneco, Inc. v. Sutton, ¹⁴ a federal court recently applied the Commerce Clause to hold unconstitutional a series of Louisiana constitutional provisions, statutory provisions, and regulations. The Louisiana laws were not facially neutral; rather, they distinguished between interstate and intrastate facilities and transactions in many respects. Once the Judge found facial discrimination rather than facial neutrality, the case was effectively decided, since it is extraordinarily rare for a court to find a facially discriminatory statute sufficiently justified by a valid state purpose to withstand attack under the Commerce Clause. ¹⁵

Thus, in order to survive the Commerce Clause test, it is essential that any state statute or regulation be found facially neutral. For instance, if the statute accords some special preference to existing purchasers of gas, that preference must be extended to all such purchasers, interstate as well as intrastate. If the preference is limited to a specific class of purchaser, that class must be delimited by reference to something other than the distinction between interstate and intrastate. Similarly, if a statute burdens a class with a regulatory requirement, the same burden must be imposed on intrastate and interstate members of the class.

It is sometimes possible to define a class with reference to a characteristic that correlates with the distinction between interstate and intrastate. For instance, most sales of old gas at prices above $2.50 are intrastate. Assuming the state has a valid reason for defining the class by reference to characteristics that correlate with the interstate/intrastate distinction, it could enact a facially neutral statute that has the effect of favoring the intrastate market. Such a facially neutral statute would have a much better chance of withstanding court review. Even though the Commerce clause also forbids a state action that discriminates against interstate commerce "in its practical effect," parties challenging a facially neutral action have the difficult task of proving discriminatory effect. At the very least, a facially neutral statute would require a court to apply the subjective, unpredictable balancing test reflected in the second and third parts of the Hughes test and the Sporhase test. Once a court begins searching for practical effects and balancing perceived practical effects against putatively legitimate local interests, the state action has a reasonable chance of surviving scrutiny under the Commerce Clause. The state also obtains other advantages in such a situation. Enforcement of a facially neutral statute is less likely to be enjoined during proceedings challenging its validity, and those proceedings are likely to be protracted because of the need to present extensive evidence establishing the practical effect of the statute.

3. Summary of Commerce Clause Constraints

Three generalizations emerge from the preceding analysis. First, state actions governing privately owned goods that, on their face, provide any preference for the intrastate market or impose any burden on the interstate market not equally applicable to the intrastate market have virtually no chance of surviving an attack under the Commerce Clause. Their enforcement is likely to be enjoined promptly, and they will be held unconstitutional after a relatively brief proceeding. Second, state actions facially preferring the intrastate market in the sale of gas originating on state lands have a better chance of surviving a challenge under the Commerce Clause, but the scope of the Court's holding in Reeves is not at all clear. Even these state actions ultimately may be held to violate the Commerce Clause. Third, state actions that are neutral on their face but that in fact favor the intrastate market because of a correlation between some defensible characteristic and the interstate/intrastate distinction have some chance of surviving a challenge under the Commerce Clause. In addition, they are likely to be allowed to remain in effect during proceedings concerning their validity.

B. Supremacy Clause Constraints

The other major federal constitutional constraint on Louisiana actions designed to ameliorate the problems in the intrastate gas market is the Supremacy Clause. If a state statute is in any respect inconsistent with a federal statute, the Supremacy Clause requires a court to hold the state statute invalid. While it is very common for a court to hold a state statute invalid under both the Supremacy Clause and the Commerce Clause, the Supremacy Clause is an independent constraint on state actions. In an industry like natural gas, where federal statutes (NGA and NGPA) empower federal agenicies to regulate pervasively most aspects of the industry, there is the potential for a state action to survive scrutiny under the Commerce Clause but to be held invalid under the Supremacy Clause.

Analysis of federal pre-emption of state authority under the Supremacy Clause is a very tricky business. The Supreme Court's opinions in this are neither clear nor consistent. ¹⁶ Once Congress enacts legislation regulating in detail any area, it is easy to identify a number of actions that are clearly beyond state power, but there are many other types of state actions that fall into a large grey zone of uncertainty. Frequently, the court must resolve the pre-emption issue by attempting to determine the intent of Congress in enacting a provision of a statute when there is simply no evidence Congress even considered the issue an which the Court must divine congressional intent. There are least five bases on which a court can premise a holding that a state statute is pre-empted by federal legislation.

1. Direct Conflicts

The most simple form of pre-emption analysis applies to direct conflicts between state and federal law. When a state statute requires action inconsistent with action required by a federal statute, the state statute is always invalid. ¹⁷ For instance, a state cannot impose a minimum rate in excess of a maximum rate established by federal law.¹⁸

2. Potential Conflicts

Even when a state statute seems facially consistent with a federal statute, a court often holds the state statute unconstitutional if it finds that there is the potential for future conflicts between the state and federal statutes. This form of pre-emption is applied frequently to invalidate state statutes conferring upon a state regulatory agency jurisdiction over transactions that are also subject to the regulatory jurisdiction of a federal agency. ¹⁹ In this class of cases, the court is concerned that a state agency may take actions inconsistent with those of the federal agency even if the standards authorizing the two agencies to act appear identical. Not all state statutes authorizing concurrent jurisdiction are held invalid, however. In some cases, the court determines that Congress did not intend to displace all forms of concurrent state regulation.²⁰

3. Implicit Pre-emption Through Failure to Regulate

Sometimes a court concludes that a congressional decision not to regulate a class of transactions was intended to foreclose all regulation, whether federal or state. Thus, if Congress considers regulating an area but decides not to do so or repeals a prior statutory provision authorizing federal regulation, a court may hold invalid a state statute purporting to regulate the transactions Congress declined to regulate. ²¹ A congressional decision not to regulate is ambiguous, however. Congress could have based its action on a determination that regulatees should not be burdened by such a requirement imposed by anyone, or it could have based its action on a determination that there was no federal need to impose such a requirement. The first is inconsistent with state imposition of a comparable requirement; the second is not.²² Thus, courts try to determine the reason Congress eliminated a federal obligation before concluding that a state statute imposing a comparable requirement is pre-empted.

4. Frustration of Federal Goals

Courts sometimes hold state legislation unconstitutional because the state legislation would frustrate the federal attempt to achieve one or more of the goals underlying a federal statute.²³ This version of pre-emption analysis is difficult to apply, however, since it requires a court to balance (1) the strength of the federal goal, against (2) the extent of the frustration of that goal caused by the state action, and (3) the justification for the state action. Courts hold a state action Pre-empted by a federal goal only when the federal goal is clear and the state action interferes with pursuit of that goal in a direct and substantial way.²⁴

5. Intent to Occupy the Field

Sometimes federal regulation of a subject matter is so extensive and so detailed that courts hold invalid virtually all state attempts to regulate that subject matter in any way. ²⁵ In determining whether to apply this particularly broad form of preemption analysis, the courts focus on the extent of federal involvement in the area. The wide scope and great detail of the federal program for regulating the natural gas industry frequently results in broadly stated court holdings that Congress has so occupied the field that it intended to leave no room for state regulation.

6. Summary of Supremacy Clause Constraints

The pre-emption issue is at bottom an exercise in interpretation of federal statutes that, in the context of gas regulation, starts with a presumption that the federal government intended to displace state power except where it clearly indicated a contrary intent. Thus, the opportunities for state actions that will withstand attack under the Supremacy Clause may be limited to those areas in which Congress either: (1) specifically declined to give federal agencies power to act because it wanted to preserve state power or (2) specifically delegated power to the states. Examples of the former include: physical production and local distribution of gas exempted by NGA section 1(b), Hinshawed pipelines exempted by NGA section 1(c), and intrastate pipeline activities except to the extent they fall within NGPA sections 311 and 312. An example of the latter is the state power to set lower price ceilings on producer sales of intrastate gas granted by NGPA section 602.

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