CHAPTER 11 ANTITRUST PITFALLS IN THE NATURAL GAS INDUSTRY

• Jurisdiction: United States

Natural Gas Marketing and Transportation
(Sep 1991)
CHAPTER 11
ANTITRUST PITFALLS IN THE NATURAL GAS INDUSTRY
Michael B. Campbell
Campbell, Carr, Berge & Sheridan, P.A.
Santa Fe, New Mexico

TABLE OF CONTENTS

SYNOPSIS

Page

A. INTRODUCTION

B. AN OVERVIEW OF THE PRINCIPAL ANTITRUST STATUTES

1. Antitrust "Conspiracy" under Section 1 of the Sherman Act, 15 U.S.C.

a. Price-Fixing Conspiracies

b. Tying Arrangements

c. Concerted Refusal to Deal—Group Boycott

d. Market Allocations

2. Monopolization under Section 2 of the Sherman Act, 15 U.S.C.

a. Actual Monopolization

b. Attempted Monopolization

c. Conspiracy to Monopolize

d. Monopoly Leveraging

e. The Essential Facilities Doctrine

3. Price Discrimination under the Robinson-Patman Act, 15 U.S.C.

4. Mergers and Acquisitions Governed by Section 7 of the Clayton Act, 15 U.S.C.

5. State Antitrust Statutes

6. Antitrust Defenses

a. "Standing" to Initiate Antitrust Actions

b. The "State Action" Defense

c. The "Filed Rate" Defense

d. The Noerr-Pennington Defense

C. ANTITRUST ENFORCEMENT IN THE NATURAL GAS INDUSTRY—AN HISTORICAL PERSPECTIVE

[Page 11-ii]

D. APPLICATION OF ANTITRUST LAW TO THE DEREGULATED NATURAL GAS INDUSTRY

1. "Conspiracy" Cases in the Natural Gas Industry

a. The Price-Fixing Cases

(1) In re New Mexico Natural Gas Antitrust Litigation

(2) In re Wyoming Tight Sands Antitrust Cases

(3) Miscellaneous Pricing Fixing Allegations

(4) Regulatory Settlements at FERC

b. The "Tying" Cases

(1) The Panhandle Eastern Litigation

(2) Reynolds Metals Co. v. Columbia Gas Systems, Inc.

c. Concerted Refusals to Deal—Group Boycotts

d. A Possible Market Allocation Violation

2. "Monopolization" Cases in the Natural Gas Industry

a. Actual Monopolization Cases

(1) The Panhandle Eastern Litigation

(2) The City of Chanute Cases

(3) The Garshman Litigation

(4) Consolidated Gas Company v. City Gas Company

b. Attempted Monopolization

c. Monopoly Leveraging

(1) The Panhandle Eastern Litigation

(2) The City of Chanute Cases

d. The Essential Facilities Doctrine

(1) Consul, Ltd. v. Transco Energy Co.

(2) The Panhandle Eastern Litigation

(3) The City of Chanute Cases

F. CONCLUSION

———————

[Page 11-1]

A. INTRODUCTION

The natural gas industry — historically, a heavily regulated industry — has never been immune from application of federal antitrust law.¹ But prior to deregulation of the industry, antitrust complaint, both private and public, was sporadic and limited in content.

Since deregulation, that circumstance has changed.² Since deregulation, both the frequency and content of antitrust actions have expanded.³ In particular, private antitrust actions, in all permutations, have increased, sometimes with severe consequence. Pipelines and producers have been sued for price-fixing. Producers have attempted to add antitrust claims to their arsenal in take-or-pay litigation. Selected pipelines have defended producer take-or-pay claims with their own antitrust allegations. End-users and, in one instance a gas broker, have sued pipelines invoking monopolization, monopoly leveraging and essential facilities claims. Competing LDC's have asserted territorial restriction claims against each other. It can be said with some certainty that any active participant in this deregulated market environment who proceeds unattuned to the potential antitrust consequences of its conduct does so at its peril.

The purpose of this paper is to provide industry representatives a current and relatively detailed understanding of the major antitrust implications (i.e. "pitfalls") arising from the gathering and marketing of natural gas since passage of the Natural Gas Policy Act of 1978, and in particular, since adoption of the "open access" provision of FERC Order 436 and its progeny. In Section B ("An Overview of the Principal Antitrust Statutes"), a broad summary of the principal antitrust statutes, as interpreted by seminal case law in the particular area, is presented. It is not the intent of this section to examine each of the many nuances in antitrust interpretation. Rather, the objective is to provide

[Page 11-2]

interested observers with a broad but thorough background on the principal federal statutes and defenses which have been or may be employed in antitrust litigation in the deregulated natural gas industry. State antitrust statutes, which may take on added import to the industry in light of the Supreme Court's rather ominous antitrust "standing" decision in California v. ARC America Corp.,⁴ are also addressed. Sections C ("Antitrust Enforcement in the Natural Gas Industry — An Historical Perspective") and D ("Application of Antitrust Law to the Deregulated Natural Gas Industry") examine the specific application of antitrust principles to the natural gas industry. Attempt has been made to identify all substantive "antitrust cases" involving the natural gas industry since inception of the "deregulated" market. The factual and legal underpinnings of those cases, organized to track the paper's presentation of "general" antitrust concepts contained in Section B, are presented and analyzed in detail.

It is hoped that an examination of the holdings of these decisions can provide guidance to industry participants in avoiding the "antitrust pitfalls" now attendant to all aspects of gathering and marketing of natural gas.

B. AN OVERVIEW OF THE PRINCIPAL ANTITRUST STATUTES

The objective of the antitrust laws is to insure "unfettered competition" as a rule of commerce. As noted in an oft-quoted Supreme Court decision, Northern P.R. Co. v. United States⁵ :

The Sherman Act was designed to be a comprehensive charter of economic liberty aimed at preserving free and unfettered competition as the rule of trade. It rests on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices, the highest quality and the greatest material progress, while at the same time providing an environment conducive to the preservation of our democratic, political and social institutions. But even were that premise open to question, the policy unequivocally laid down by the Act is competition.

The standard aphorism is that antitrust law protects "competition," and not "competitors."⁶

[Page 11-3]

This section will identify and briefly discuss the major antitrust statutes which serve to protect "competition."

1. Antitrust "Conspiracy" under Section 1 of the Sherman Act, 15 U.S.C. 1.

Section 1 of the Sherman Act, 15 U.S.C. 1 prohibits:

[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations....

Violation of the Act may constitute a criminal felony, prosecutable by the Department of Justice, carrying a maximum penalty for each violation of three years imprisonment and fines of up to $350,000 for individuals and $10 million for corporations.⁷ Additionally, pursuant to provisions of the Clayton Act, "any person" injured in his trade or business by reason of a Section 1 violation may initiate private civil litigation for recovery of treble damages, attorneys fees and injunctive relief.⁸ Additionally, the states' Attorneys General may bring parens patriae suit for treble damages on behalf of natural persons injured by a Section 1 violation.⁹

By its express terms, Section 1 requires concerted action; it does not reach unilateral action of individuals or firms acting alone. Accordingly, the first element of any Section 1 case requires the existence of a "contract, combination or conspiracy."¹⁰ The Copperweld decision is of particular import to the natural gas industry.¹¹ There, the Court held that a corporate parent and its wholly-owned subsidiary "are incapable of conspiring with each other for purposes of Section 1 of the Sherman Act."¹² Copperweld thus elicited a sigh of relief from pipeline companies and their wholly-owned producing subsidiaries, the not-usual targets of antitrust plaintiffs.¹³

[Page 11-4]

The second element of a Section 1 case, as developed by the courts, is that the concerted behavior must be "unreasonably restrictive" of competitive conditions.¹⁴ Every contract for the sale of goods can be said to "restrain" competition. Section 1 condemns only those which do so "unreasonably." Certain concerted conduct, because of its "pernicious effect on competition and lack of any redeeming virtue" is conclusively presumed to be unreasonable and therefore illegal, without elaborate inquiry as to the precise harm it has caused or the business excuse for its use.¹⁵ Such conduct is considered to be illegal per se. Concerted action which is not illegal per se is examined under the so-called Rule of Reason, which in substance applies a cost/benefit analysis to the conduct from a perspective of competitive consequence.¹⁶ The factors distinguishing a per se case from a Rule of Reason case are not set in concrete; courts shift and sometimes change their minds.¹⁷ As illustrated in Section D, infra, an antitrust practitioner in the natural gas industry should not assume that challenged conduct is, or is not, per se illegal.

The following is summary description of the principal types of Section 1 cases.

a. Price-Fixing Conspiracies. It has been broadly stated that any combination or conspiracy "formed for the purpose and with the effect of raising, depressing, fixing or stabilizing the price of a commodity ... is illegal per se."¹⁸ Price fixing conspiracies can be either horizontal (among competitors at the same level of market structure) or vertical (resale price maintenance). Horizontal price fixing conspiracies are always considered per se violations of Section 1, whether such agreements fix price "floors"¹⁹ or price "ceilings."²⁰ Vertical price fixing arrangements have...