Resolving Anticompetitive Concerns, FTC Clears Southern Union's $1.8 Billion Acquisition of Panhandle Pipeline

The Federal Trade Commission today announced a proposed consent order that would preserve competition in the market for the delivery of natural gas to the Kansas City area, while conditionally allowing the $1.8 billion purchase of the Panhandle pipeline by Southern Union Company (SU) from CMS Energy Corporation (CMS). The proposed order is subject to public comment and requires SU to terminate an agreement that allowed its subsidiary Energy Worx, Inc. (Energy Worx) to manage the Central pipeline, which also delivers natural gas to the Kansas City area. The proposed order also precludes SU and CMS from transferring any interest in Panhandle to AIG, the owner of the Central pipeline. In addition, following the acquisition, neither SU nor its subsidiaries will be permitted to operate, manage, or hold any interest in, the Central pipeline.

"The transaction as proposed would have eliminated direct competition between the Central and Panhandle pipelines by placing them under common ownership or common management and control," said Joe Simons, Director of the FTC's Bureau of Competition.

"The consent agreement reached with the Commission appropriately addresses these concerns, preserving competition and protecting consumers from higher prices for natural gas pipeline services in the Kansas City area."

Parties to the Proposed Transaction

SU, headquartered in Wilkes-Barre, Pennsylvania, is engaged, either directly or through affiliates, in the distribution and sale of natural gas to residential, commercial, and industrial customers in several states, including Missouri, Pennsylvania, Rhode Island, and Massachusetts.

Under the terms of an agreement executed in November 2002, Energy Worx operated and managed the Central pipeline, which transports natural gas to certain Midwest states, including Kansas and Missouri. The Central pipeline is owned by American International Group, Inc. (AIG) through its affiliate Southern Star Central Corp. (Southern Star).

CMS, headquartered in Dearborn, Michigan, is engaged, either directly or through affiliates, in oil and gas exploration, natural gas transportation, liquified natural gas services, independent power production, gas and electricity distribution, and marketing and management services. Panhandle Eastern Pipeline Company (Panhandle), a subsidiary of CMS, owns and operates the Panhandle pipeline, which transports natural gas to customers in certain Midwest states, including Kansas and Missouri.

Through an agreement dated December 21, 2002, SU and affiliates of AIG entered into a deal to acquire Panhandle from CMS. Through that agreement, SU would have owned approximately 78 percent of Panhandle, with the AIG affiliates owning the remainder. On May 12, 2003, to address potential anticompetitive effects of the acquisition, SU entered into an amended agreement under which Southern Union Panhandle Corp., a wholly owned SU subsidiary, would buy all Panhandle capital stock from CMS Gas Transmission Company, a wholly owned subsidiary of CMS, for approximately $1.8 billion. AIG is not a party to the revised transaction and will have no ownership interest in Panhandle. At the same time, affiliates of SU and AIG entered into an agreement terminating the agreement for Energy Worx to manage and operate the Central pipeline.

The Commission's Complaint

According to the Commission's complaint, the proposed acquisition of Panhandle from CMS would violate the FTC Act and Section 7 of the Clayton Act by substantially lessening competition in the transportation of natural gas by pipeline to the Kansas City area. In considering the proposed transaction, the FTC defined the relevant line of commerce, or product market, as the transportation of natural gas by pipeline - the only way to economically transport commercial quantities of natural gas over significant distances.

The complaint further alleges that the proposed transaction would lessen competition in the Kansas City area, including the following counties: Cass, Henry, Jackson, Johnson, Lafayette, Pettis, and Saline counties in Missouri; and Anderson, Butler, Chase, Coffey, Franklin, Johnson, Lyon, Marion, Miami, and Osage counties in Kansas.

The only pipelines that transport gas to most of the relevant geographic area, according to the FTC, are the Central and Panhandle pipelines. While two smaller pipelines do serve the western portion of the market, they could not act as a pricing constraint on the two larger pipelines due to capacity and distance limitations. As a result, the Central and Panhandle pipeline are the only viable alternatives in most parts of the geographic area for customers who need natural gas.

According to the FTC, the market for the pipeline transportation of natural gas to the relevant geographic area is highly concentrated, and would become significantly more concentrated as a result of the proposed acquisition. Entry into the pipeline market is difficult, and is not likely to be timely or sufficient to offset the anticompetitive effects of the proposed transaction. Absent relief, the proposed transaction would substantially lessen competition and lead to higher prices for the transportation of natural gas to the Kansas City area by eliminating direct competition between the Panhandle and Central pipelines; by placing the two pipelines under common ownership and/or management and control; by increasing the likelihood of the exercise of unilateral market power; and by increasing the likelihood of, or facilitation of, collusion or coordinated interaction in the market.

The Proposed Consent Order

Under the proposed consent order, before the acquisition, SU must end its management services agreement with AIG for the management of the Central pipeline by Energy Worx. The proposed order explicitly prohibits SU and CMS from consummating the transaction until the agreement has been terminated. The companies terminated this agreement on May 12, 2003. After the acquisition, SU is prohibited from directly or indirectly operating or managing the Central pipeline, and from acquiring any interest in AIG or any role in managing or operating the Central pipeline.

The proposed order also prohibits SU and CMS from transferring any ownership interest in SU, Panhandle, or the Panhandle pipeline to AIG. If a nonpublic ownership interest in these assets is sold to someone other than AIG, the sale must be made with the requirement that the assets will not be transferred to AIG. Finally, the proposed order contains standard reporting, notice, and access provisions designed to allow the FTC to verify SU and CMS's compliance with its terms. The proposed order will end 10 years from the date it becomes final. The FTC received substantial assistance in this matter from the Attorney General's Office of the State of Missouri.

The Commission vote to accept the proposed consent order and place a copy on the public record was 5-0. The proposed consent order will be subject to public comment for 30 days, until June 27, 2003, after which the Commission will determine whether to make it final. Comments should be sent to: FTC, Office of the Secretary, 600 Pennsylvania Ave., N.W., Washington, DC 20580.

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 order, and an analysis 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. The FTC's Bureau of Competition seeks to prevent business practices that restrain competition. The Bureau carries out its mission by investigating alleged law violations and, when appropriate, recommending that the Commission take formal enforcement action. To notify the Bureau concerning particular business practices, call or write the Office of Policy and Evaluation, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, D.C. 20580, Electronic Mail: antitrust@ftc.gov; Telephone (202) 326-3300. For more information on the laws that the Bureau enforces, the Commission has published "Promoting Competition, Protecting Consumers: A Plain English Guide to Antitrust Laws," which can be accessed at http://www.ftc.gov/bc/compguide/index.htm.

(FTC File No.: 031-0068)