FTC Clears Sale of Gulf South Pipeline Co. To Entergy-Koch, LP

The Federal Trade Commission today accepted a final consent agreement with Entergy Corporation ("Entergy") and Entergy-Koch, LP ("EKLP"), a limited partnership owned equally by Entergy and Koch Industries, Inc., that will allow EKLP to acquire 50 percent of the Gulf South Pipeline Company, LP ("Gulf South," formerly the Koch Gateway Pipeline Company) from Koch. The Commission's order protects consumers by requiring Entergy to implement an open, transparent process to buy natural gas and natural gas transportation that will assist state regulators in determining whether Entergy purchased gas supplies from EKLP at inflated prices.

Entergy is the regulated electric and natural gas utility in parts of Louisiana and Mississippi. Under state and municipal regulations, Entergy can, subject to review, pass 100 percent of the costs of natural gas and gas transportation to consumers. After the acquisition, Entergy would benefit from paying Gulf South an inflated price for gas supplies because it would retain half of the profit and, if undetected, pass the increased costs to ratepayers. Entergy's added incentive to accept inflated costs would make it more difficult for regulators to review and challenge an imprudent purchase of natural gas transportation by Entergy.

By concurrently issuing a complaint and the decision and order contained in the consent agreement, the FTC order will remedy the anticompetitive effects of the joint venture immediately. A final order preserves an effective remedy for the Commission by subjecting the respondents to civil penalties for failing to comply with the order. This ensures that the safeguards embodied in the order will be implemented on schedule.

"Consummation of the joint venture would encourage Entergy to pay inflated prices for gas supplies and pass them on to consumers in areas of Louisiana and western Mississippi," said Molly Boast, Acting Director of the FTC's Bureau of Competition. "The Commission's order creates transparency and will provide regulators the information they need to protect consumers in these areas."

The Parties and the Proposed Joint Venture

Entergy is a Delaware Corporation that generates, transmits and distributes electricity. With 1999 revenues of approximately $8.77 billion and net income of approximately $595 million, it provides retail electric service to customers in parts of Arkansas, Louisiana, Mississippi and Texas. Entergy also owns the local gas distribution utility in New Orleans and Baton Rouge, Louisiana.

Koch is a privately held corporation headquartered in Wichita, Kansas. Through its subsidiaries and affiliates, it markets natural gas, natural gas transportation, chemicals, petroleum products, minerals and financial services. Koch conducts its natural gas business through Koch Energy Trading and Gulf South, with the former marketing natural gas, electric power and weather derivatives, and the latter owning and operating the Gulf South pipeline.

On May 26, 2000, Entergy and Koch entered into an agreement to form EKLP. Under the terms of that agreement, EKLP will acquire, among other things, Entergy Power Marketing Corporation and Entergy Trading and Marketing (Entergy's subsidiaries that market electricity and gas, respectively, in the United States), Gulf South and Koch Energy Trading from Koch. As a result of the transaction, Entergy will own half of both Gulf South and Koch Energy Trading.

The Commission's Complaint

According to the Commission's complaint, the joint venture would violate both Section 5 of the FTC Act, as amended, and Section 7 of the Clayton Act, as amended, by substantially lessening competition in two markets: 1) the sale of electricity to consumers in areas of Louisiana and western Mississippi where Entergy subsidiaries are the regulated electric utilities; and 2) the distribution of natural gas to consumers in New Orleans and Baton Rouge, where Entergy subsidiaries are the regulated natural gas distribution utilities. The FTC contends that prices are likely to rise in these markets as a result of Entergy passing on inflated costs for natural gas transportation to consumers, along with the difficulties regulators will have in reviewing and challenging Entergy's purchase of natural gas transportation from Gulf South.

The complaint states that Entergy, through its regulated subsidiaries, has the exclusive right to sell retail electricity in parts of Louisiana and Mississippi. The company's subsidiaries also have the exclusive right to distribute natural gas in New Orleans and Baton Rouge. Entergy buys substantial amounts of natural gas transportation for its regulated subsidiaries.

Under the existing regulatory framework in these markets, Entergy is allowed to recover the total cost of natural gas transportation purchased for its natural gas and electric utilities by passing this cost directly to consumers. The FTC's complaint alleges that once Entergy shares in the profits of Gulf South, it will have the incentive and ability (and is therefore likely) to pay higher prices for transportation on Gulf South and purchase a level of transportation services from Gulf South above that which is needed to effectively operate its utilities.

The complaint also alleges that after EKLP acquires Gulf South, it would be difficult for state and local regulators to determine whether Entergy has improperly incurred inflated natural gas transportation costs than before the transaction. Entergy's natural gas transportation purchasing decisions involve the consideration of multiple factors, the process of these gas transportation purchases is not transparent, and existing benchmarks are inadequate to help regulators determine whether the company's costs are incurred prudently. In addition, Entergy's ownership of EKLP and the Gulf South pipeline increases Entergy's incentive to evade regulation, and is therefore likely to make the regulators' task more difficult.

The Consent Agreement

Under the terms of the consent agreement, the alleged anticompetitive effects of the proposed joint venture will be addressed through the establishment of a competitive and transparent process that prevents Entergy from evading regulation. The order affects how Entergy buys its natural gas, whether it purchases pipeline transportation to deliver gas to facilities operated by its regulated utilities or buys delivered natural gas.

In recognition of the need for Entergy to buy a flexible, reliable and economical gas supply, the order contains provisions tailored to reflect the duration of the company's contracts. For long-term and short-term purchases of natural gas and gas transportation, Entergy must prepare a written plan before requesting proposals for gas supply services. This plan must include, among other things, a statement explaining the company's goals, such as achieving a reliable source of gas at certain plants. These documents will allow state and local regulators to compare actual purchases with Entergy's forecasted gas supply requirements.

In addition, the order requires Entergy to post information about its gas supply requirements on its Internet website. The timing of the posting and required information is based on the duration of the contract's terms and the pace of market activity. For long-term gas supply purchases, Entergy must post a request for proposal ("RFP") that contains, among other things, the criteria that suppliers must meet to qualify for consideration and the types of services, the amount of gas and the duration of the contract. Entergy must post this RFP at least 30 days before any purchase under a contract whose term is one year or more, and at least 14 days before any purchase under a contract whose term is between three months and one year. These time frames will provide suppliers with enough time to prepare their bids, without causing unnecessary delay. The order also requires Entergy to provide RFPs to any potential supplier upon request and to consider any proposal from any potential supplier.

For short-term purchases, Entergy must post information detailing its gas supply requests at least 72 hours before considering any proposal for a term of at least one month. As with long-term purchases, the order requires EKLP to ensure that Gulf South posts each announcement on its website before submitting a proposal to Entergy, and requires Entergy to consider all proposals from any potential supplier. Entergy is also required to create a log for all short-term purchases, documenting the date, time, seller, and terms for all offers received and indicating the proposal selected.

For daily purchases, Entergy is required to publish on its website its intention to purchase gas supplies at various receipt and delivery points. The information in this notice is more limited than that required for long-term and short-term purchases. In addition, Entergy is required to provide potential suppliers with the specific terms and conditions for which it seeks to purchase gas supplies upon request. The company must also maintain a log of all proposals to supply natural gas and gas transportation containing the same information that is required for short-term purchases, but does not have to develop a planning document as it does for other types of purchases.

Finally, the order designates Stephen P. Reynolds as implementation trustee. In this position, he will ensure that the terms of the order are successfully implemented. He will serve for either one year or until the date on which he certifies to the FTC that the parties have put in place adequate procedures in accordance with the order and the Commission accepts such certification, whichever comes first.

Effective Date of the Order

In August 1999, the FTC adopted procedures that allow for an order to become effective immediately, prior to a public comment period, stating that it would take such action "only in exceptional cases where, for example, it believes that the allegedly unlawful conduct to be prohibited threatens substantial and imminent public harm." In this matter, the Commission issued the complaint, decision and order, and served them upon the respondents. At the same time, it accepted the consent agreement for public comment. As a result of this action, the order has become effective already.

This case is an appropriate case in which to issue a final order before receiving public comment because it preserves an effective remedy for the FTC by subjecting the respondents to civil penalties if they do not comply with its terms. This ensures that the safeguards included in the order will be implemented on schedule. Still, the order has been placed on the public record for 30 days, until March 2, 2001, so interested parties may submit their comments, and those received during this period will become part of the public record. The Commission will then review the order and may determine, on the basis of comments or other information, that it should be modified. 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; issue the complaint and decision and order as final; and approve Stephen P. Reynolds as implementation trustee was 4-0, with Commissioner Sheila Anthony recused.

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, 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.