The Federal Trade Commission has accepted a proposed consent order that would allow the $16 billion merger of El Paso Energy Corporation ("El Paso") and the Coastal Corporation ("Coastal"), while addressing the competitive concerns identified regarding the transaction as originally proposed. Through the agreement, El Paso and Coastal would be required to divest their interests in 11 natural gas pipeline systems totaling more than 2,500 miles of pipe. The agreement provides for the divestiture of the proposed Gulfstream pipeline in Florida to a new purchaser - restoring competition to pre-merger levels and assuring future competition for natural gas transportation into the state. The agreement also provides for divestiture of El Paso and Coastal interests in existing natural gas pipelines serving customers in New York State and the Midwest. In addition, it would restore competition in the Gulf of Mexico by requiring the divestiture of seven pipelines and establishing a development fund for the purchaser of El Paso's Green Canyon and Tarpon pipelines to cover the costs of extending these pipelines to specified areas in the Gulf where El Paso and Coastal pipelines are significant competitors.
"The series of divestitures required by this order address the very real competitive concerns that have resulted from the recent and rapid consolidation in the U.S. market for natural gas transportation," said Molly S. Boast, Acting Director of the FTC's Bureau of Competition. "Appropriately, the order goes even further, by requiring competitive protections for future pipeline construction and extensions in key parts of the country." Boast thanked the Attorneys General of Florida, New York and Wisconsin for their help in negotiating the terms of the consent order, as well as those in Texas, Illinois, Pennsylvania and Utah for assisting in the investigation.
The Proposed Respondents
El Paso is a Delaware corporation that produces, gathers, processes, transports and stores natural gas. It also is involved in marketing natural gas, power and other energy-related commodities; power generation; the worldwide development and operation of energy infrastructure facilities; and domestic exploration for natural gas and oil. The company, which had 1999 revenues of $10.6 billion and earnings of $191 million, owns or has interests in more than 38,000 miles of natural gas pipelines in the United States.
Coastal, also a Delaware corporation, is a diversified energy and petroleum products company that produces, gathers, processes, transports, stores and markets natural gas throughout the United States. With 1999 revenues of $8.2 billion and earnings of $996.1 million, it is also engaged in refining, marketing and distributing petroleum products nationwide. It either owns or has interests in more than 18,000 miles of natural gas pipelines serving the Rocky Mountain area, the Midwest, the south-central United States, New York State and other areas of the northeastern United States. Though this transaction, El Paso will acquire all of Coastal's common stock, with Coastal's former shareholders owning approximately 53 percent of El Paso's voting securities.
The Relevant Product Markets
The Commission's complaint defines one relevant product market as the transportation of natural gas via pipeline. For many end users, such as homeowners, there is no alternative to natural gas and no practical alternative to pipeline transportation. The market is further broken down by focusing on long-term firm transportation, a type of transportation service requiring the pipeline company to guarantee for one year or more that it will transport a specified daily amount of natural gas from one destination to another without interruption. A third relevant market in which the effects of the proposed transaction are evaluated is the provision of tailored services. Such services, which allow natural gas users to balance changes in natural gas demand with the supply of natural gas and transportation, include limited and no-notice service, and are typically sold in conjunction with natural gas storage services.
The Proposed Complaint
According to the Commission's complaint, the acquisition as proposed would violate Section 5 of the FTC Act and Section 7 of the Clayton Act by eliminating actual and direct competition between El Paso and Coastal in the following markets: 1) Central Florida; 2) the metropolitan areas of Buffalo, Rochester, Syracuse and Albany, New York; 3) the metropolitan area of Milwaukee, Wisconsin; 4) the metropolitan area of Evansville, Indiana; and 5) 13 areas in the Gulf of Mexico. The FTC contends that the market for natural gas and natural gas transportation in these areas is highly concentrated and that the proposed transaction would substantially increase that concentration. In each of the relevant markets, pipelines owned by El Paso and Coastal are two of the most significant competitors. In some instances, El Paso and Coastal are the only two options available to customers, and in other instances, they represent two of three options. The merger would not only eliminate existing competition between El Paso and Coastal, but also threaten to forestall potential new competition as well. Following the consummation of the transaction, the complaint states, direct competition between El Paso and Coastal would be eliminated in these markets, leading to increased transportation prices and a decrease in overall output, thereby increasing the cost of electricity and natural gas.
In addition, the Commission alleges that new entry into the relevant geographic markets would not be likely, timely or sufficient to prevent or counteract the anticompetitive effects of the transaction, because there are substantial barriers to entry. Building additional pipelines is expensive and may require approval by the Federal Energy Regulatory Commission ("FERC"). Other factors likely to limit entry include the considerable time needed to secure rights of way, overcome landowner and environmental hurdles, secure sufficient advance commitments from customers and obtain regulatory approvals in the face of opposition from competition.
Terms of the Proposed Order
The proposed consent order would remedy the potential anticompetitive effects of the transaction by requiring, within 10 days of the date the merger is closed, that the respondents divest their interests in the following: 1) Gulfstream Natural Gas System to Duke Energy and Williams Gas Pipeline; 2) the Empire pipeline (which serves customers in Buffalo, Rochester and Syracuse, New York) to Westcoast Energy; 3) the Green Canyon and Tarpon pipelines (located in the Gulf of Mexico) to Williams Field Services; 4) the Manta Ray, Nautilus and Nemo pipelines (located in the Gulf of Mexico) to Enterprise Products; and 5) the Stingray pipeline (also located in the Gulf of Mexico) to Shell Gas Transmission and Enterprise Products. Within four months, El Paso and Coastal would also be required to divest their interests in the Midwestern Gas Transmission ("MGT"), UTOS and Iroquois pipelines to Commission-approved acquirers. The MGT pipeline extends from the Kentucky/Tennessee border north and west to the Chicago area; the UTOS pipeline is located in the Gulf of Mexico; and the Iroquois pipeline extends from the Canadian border into major metropolitan areas in the northeast, including New York City and the Albany, New York area.
Regarding the Empire, MGT, Stingray and UTOS pipelines, the respondents would be required to provide transitional services to the acquirers at a reasonable fee to enable the acquirers to operate them. They would also be required to give the acquirers the opportunity to transfer applicable employment relationships from either Coastal or El Paso to help ensure that the transition of the pipelines to the new owners will be successful and efficient.
Regarding the Gulfstream Natural Gas System, which is beginning to build a 744-mile natural gas pipeline that will originate near Mobile Bay, Alabama - extend across the Gulf of Mexico to the west coast of Florida near Tampa and to various locations in the Florida peninsula - the order would require El Paso and Coastal to provide consulting services to the acquirer at a reasonable rate until June 2002 to ensure that the in-service date of June 1, 2002 is met. El Paso and Coastal would also be prohibited from acquiring any long-term capacity in the Gulfstream System (except for its own end use) and from disclosing or making available any confidential Gulfstream information - except as needed to provide consulting services for the system's acquirer.
The divestiture of MGT is required to address competitive concerns in the Milwaukee and Evansville markets. The order would require El Paso and Coastal to include and enforce a provision in the sales agreement that requires the acquirer to connect MGT to the Guardian pipeline ("Guardian Interconnection"). The Guardian pipeline is a new pipeline that is proposed to serve customers and compete with the merged firm in the Milwaukee, Wisconsin area starting in late 2002. The companies would also be prohibited from taking (or failing to take) any unfair or deceptive action that would prevent, hinder, or delay the completion of the Guardian Interconnection; and from failing to disclose publicly to the FERC and the Public Service Commission of Wisconsin either their own or third-party funding designed to oppose the Guardian pipeline. MGT must be divested to an FTC-approved acquirer within four months of the date the consent agreement is accepted for public comment.
Regarding the respondents' interest in the Iroquois pipeline, El Paso and Coastal also would be prohibited from serving on any committee of Iroquois Gas, attending any meetings of such a committee, or receiving any information about Iroquois not available to all shippers or the public. Until the respondents are removed from the Iroquois Management Committee, the order would require that their vote be cast in favor of pipeline expansion, if such a vote takes place. Finally, the respondents would be required to vote to create unanimity when such an action is required to cast a bloc vote. The goal of these provisions is to ensure that the respondents do not gain access to competitively sensitive information that could be used to prevent competition between themselves and Iroquois, or to limit the ability of Iroquois to expand into the Albany, New York market.
Also under the proposed order, El Paso and Coastal would be required to create a $40 million fund, within 10 days of divesting the Green Canyon and Tarpon pipelines, that would be used to pay the direct costs of building a natural gas pipeline or related facility that originates at any pipeline owned by the Green Canyon and Tarpon acquirer and extends to specified locations in the Gulf of Mexico. The purpose of this fund is to ensure that competition is maintained by allowing these pipelines to extend into an area of competitive concern and to compete with the respondents in that area. Any money remaining in the fund after 20 years would be paid back to the respondents.
Further, the order would require that El Paso and Coastal help the acquirers of the divested pipelines in obtaining any approval, consent, ratification, waiver or other authorization that is (or will become) necessary to complete the divestitures required under the order.
El Paso and Coastal also would be subject to an Order to Maintain Assets, which would be issued by the Commission. Under this Order, between the time the consent agreement is signed and the dates the applicable assets are divested, El Paso and Coastal must maintain the assets in substantially the same condition as they were on the date the agreement was signed. They must also use their best efforts to ensure the services of current personnel relating to the assets to be divested remain available, maintain the good will of those entities that have business relationships with these assets, and preserve the assets intact as ongoing businesses. In addition, they would be required to provide the assets' acquirers with the chance to hire personnel who are currently working on the assets to be divested.
Lastly, Dominion Resources, which already owns 16 percent of Iroquois and will acquire part of the respondents' interest in this pipeline, would be required to give the FTC advance written notification of transactions that would increase its interest in Iroquois beyond the additional 8.72 percent interest specified in the proposed agreement.
A summary of the proposed consent agreement will be published in the Federal Register shortly. The agreement will be subject to public comment for 30 days, until February 28, 2001, after which the Commission will decide whether to make it final. Comments should be addressed to the FTC, Office of the Secretary, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.
The Commission vote to accept the proposed consent agreement and Order to Maintain Assets was 5-0.
NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.
Copies of the complaint, proposed consent agreement, and an analysis of the proposed consent order to aid public comment, are available from the FTC's web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580; 1-877-FTC-HELP (877-382-4357); TDD for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.
(FTC File No. 001-0086)