Analysis of the Draft Complaint and I. Introduction The Federal Trade Commission ("Commission") has accepted for public comment from El Paso Energy Corporation ("El Paso") an Agreement Containing Consent Order ("the proposed consent order"). El Paso has also reviewed a draft complaint that the Commission contemplates issuing. The proposed consent order is designed to remedy likely anticompetitive effects arising from El Paso's proposed acquisition of all of the voting securities of Sonat Inc. II. Description of the Parties and the Proposed Acquisition El Paso, a Delaware corporation headquartered in Houston, Texas, owns and operates natural gas transmission, gas gathering and processing, energy marketing, power generation and international energy infrastructure development companies. It operates through the following business units: Tennessee Gas Pipeline Company, East Tennessee Natural Gas Company, El Paso Natural Gas Company, El Paso Field Services Company, El Paso Energy Marketing Company, and El Paso Energy International Company. In addition to its wholly-owned interests, El Paso also controls offshore pipelines through its interest in Leviathan Gas Pipeline Partners, L.P. ("Leviathan"), a publicly held Delaware limited partnership. El Paso holds a 34.5 percent effective ownership interest in, and is the general partner of, Leviathan. Leviathan owns interests in pipelines across the Gulf of Mexico, including Stingray and Viosca Knoll Gathering Company ("VKGC"), the two pipelines relevant to this matter. El Paso operates both of these pipelines. Sonat, a Delaware corporation headquartered in Birmingham, Alabama, is an integrated energy company engaged in exploration and production of oil and natural gas, interstate transmission of natural gas and energy services. Through its natural gas transmission segment, Sonat owns interests in more than 14,000 miles of natural gas pipelines. Sonat's Southern Natural Gas Company is the major pipeline in the Southeast, with customers in seven states. Sonat's 50 percent-owned Florida Gas Transmission Company is the principal pipeline serving Florida. Sonat's revenues for the year ending 1998 were $3.7 billion. It has assets of nearly $4.4 billion. On March 13, 1999, El Paso and Sonat entered into an Agreement and Plan of Merger pursuant to which El Paso intended to acquire 100 percent of the voting securities of Sonat. III. The Draft Complaint The draft complaint alleges two relevant lines of commerce: the transportation of natural gas out of producing fields and the transportation of natural gas into gas consuming areas.
The draft complaint alleges two relevant sections of the country in which to analyze the acquisition by El Paso of Sonat's natural gas pipelines out of the producing fields. The first is the area of the Gulf of Mexico off the coast of the State of Louisiana that contains portions of the areas known as the West Cameron Area, West Cameron South Addition Area, East Cameron Area, East Cameron South Addition Area, Vermillion Area and Vermillion Area South Addition, and the Garden Banks Area. Pipeline capacity for transporting natural gas out of this section of the country is approximately 2900 million cubic feet per day. El Paso and Sonat are direct and substantial horizontal competitors in this relevant market. El Paso, through its interests in Leviathan, controls a 50 percent share of Stingray Pipeline Company, which owns a large natural gas transmission system extending more than 100 miles into the Gulf of Mexico off the coast of Louisiana. It gathers gas from these areas and delivers the gas to shore. Sonat owns and operates Sea Robin Pipeline Company which starts from shore a few miles east of Stingray. Sea Robin also gathers gas from these areas and delivers it to shore. The draft complaint alleges that the post-merger market would be highly concentrated and that the acquisition would substantially increase concentration in the market. The acquisition would increase the Herfindahl-Hirschman Index (commonly referred to as "HHI")(1) in the geographic market by over 1000 points to over 4400. The draft complaint further alleges that the effect of the acquisition may be substantially to lessen competition or tend to create a monopoly in the transportation of natural gas out of producing fields in the relevant section of the country by eliminating actual and potential competition between El Paso and Sonat; by eliminating actual and potential competition among competitors generally; and by increasing concentration in the transportation of natural gas out of producing fields in the relevant section of the country, therefore increasing the likelihood of collusion. The draft complaint alleges that entry would not be timely, likely or sufficient to prevent anticompetitive effects in the relevant markets. The second relevant offshore geographic market consists of portions the offshore Gulf of Mexico areas known as the Main Pass, including its additions and extensions; South Pass; South Pass East Addition; Viosca Knoll; and Mississippi Canyon. Pipeline capacity for transporting natural gas out of this section of the country is approximately 3050 million cubic feet per day. El Paso, through its control of VKGC, and Sonat, through its ownership interests in Destin Pipeline Company, L.L.C. ("Destin"), and in other ways, are direct and substantial competitors in the business of transporting natural gas out of producing fields in the relevant sections of the country listed above. VKGC operates a large natural gas gathering system extending more than 100 miles into the Gulf of Mexico off the coast of Louisiana. Destin owns a large natural gas gathering system extending more than 100 miles into the Gulf of Mexico off the coast of Louisiana. Sonat owns a one-third membership interest in Destin and operates the pipeline owned by Destin. The draft complaint alleges that the post-merger market would be highly concentrated, and that the acquisition would substantially increase concentration in the market. The acquisition would increase the HHI in the geographic market by over 1000 points to over 4300. The draft complaint alleges that the effect of the acquisition may be substantially to lessen competition or tend to create a monopoly in the transportation of natural gas out of producing fields in the relevant section of the country by eliminating actual and potential competition between El Paso and Sonat; by eliminating actual and potential competition among competitors generally; and by increasing concentration in the transportation of natural gas out of producing fields in the relevant section of the country, therefore increasing the likelihood of collusion. The draft complaint further alleges that entry would not be timely, likely, or sufficient to prevent anticompetitive effects in the relevant market.
The draft complaint alleges that a relevant line of commerce is the transportation of natural gas into gas consuming areas and a relevant section of the country is eastern Tennessee and northern Georgia and submarkets thereof. This region includes the metropolitan areas of Atlanta, Georgia and Chattanooga and Knoxville, Tennessee. Customers in this area of the country purchase contracts for the transportation and delivery of over 750 million cubic feet of natural gas per day. El Paso and Sonat are direct and substantial competitors in the business of transporting natural gas into this section of the country. El Paso's Tennessee Gas Pipeline Company owns and operates a large natural gas transmission system extending from producing fields in the Gulf of Mexico, Texas, and Louisiana through several states in the southern United States, including Tennessee, and on into the northern United States. In the State of Tennessee, Tennessee Gas Pipeline interconnects with, and delivers natural gas to, a pipeline owned and operated by East Tennessee Natural Gas Company ("ETNG"), also an El Paso subsidiary. ETNG transports natural gas received from Tennessee Gas Pipeline Company, and from other sources, to many local gas distribution utilities in eastern Tennessee and northern Georgia. Sonat owns Southern Natural Gas Company, which owns and operates a large natural gas transmission system extending from producing fields in the Gulf of Mexico and Louisiana through several states in the southern United States, including Georgia and Tennessee. Sonat, either directly, or via interconnection with East Tennessee Natural Gas, transports natural gas for many local gas distribution utilities in eastern Tennessee and northern Georgia. El Paso offered reduced transportation rates to local gas distribution utilities located in eastern Tennessee in response to a threat by Sonat to by-pass ETNG by extending its own pipeline. The draft complaint alleges that the post-merger market would be highly concentrated, and that the acquisition would substantially increase concentration in the market. In the least concentrated submarket of the geographic market, the acquisition would increase the HHI by over 1000 points to over 5700. In certain other submarkets, the acquisition would increase the HHI by over 4500 points to 10000. The draft complaint alleges that the effect of the acquisition may be substantially to lessen competition or tend to create a monopoly in the transportation of natural gas into the relevant section of the country by eliminating actual and potential competition between El Paso and Sonat; by eliminating actual and potential competition among competitors generally; and by increasing concentration in the transportation of natural gas into the relevant section of the country, therefore increasing the likelihood of collusion. The draft complaint further alleges that entry would not be timely, likely or sufficient to prevent anticompetitive effects in the relevant markets. IV. Terms of the Proposed Consent Order The proposed consent order is designed to remedy the Commission's competitive concerns about the proposed acquisition. To solve the competitive concerns in the onshore markets, the proposed consent order requires El Paso to divest ETNG, the owner of the El Paso system that serves cities in east Tennessee and northern Georgia. To solve the competitive concerns offshore, the proposed order requires El Paso to divest Sea Robin (a wholly-owned subsidiary of Sonat) and Sonat's 33 percent interest in Destin. The proposed consent order requires divestiture of the relevant assets within six months of the date on which the consent agreement was signed at no minimum price to a buyer and in a manner that are approved by the Commission. In the event divestiture has not occurred within six months, the proposed order provides that the Commission may appoint a trustee to divest the assets. The proposed order does not require that El Paso present the Commission with a buyer of the assets to be divested before acceptance of the proposed consent agreement for public comment (an "up-front buyer") because El Paso has satisfied the Commission that, in this instance, consumers will not be harmed by a post-order divestiture. In some cases the Commission has required a respondent to divest "crown jewel" assets in the event the respondent fails to divest a narrower package of assets promptly. Such a crown jewel is unnecessary in this case. El Paso has agreed to divest a package of assets that includes ETNG and Sea Robin in their entirety, which should help ensure that the divestiture will convey a saleable and competitively viable set of assets. This will increase the likelihood of finding a buyer acceptable to the Commission in a timely manner. Therefore, the proposed divestiture should readily suffice to remedy consumer harm. The proposed order contains ancillary provisions in both the onshore and offshore markets. Many customers on the ETNG system have ETNG and Tennessee Gas Pipeline transportation and/or storage contracts with renewal elections to be made in the midst of the proposed ETNG divestiture process. The proposed order extends the renewal deadline for these contracts until 60 days following the divestiture of ETNG, provides customers the option of extending the expiration dates of these contracts, and allows customers to terminate certain other ETNG and Tennessee Gas Pipeline contracts entered into as the proposed divestiture process is underway. The purpose of these provisions is to permit the customer to know the identity of the acquirer of ETNG before having to commit to new contracts for transportation or storage either on ETNG or, more significantly, on the trunklines that transport the gas from the Gulf of Mexico into ETNG. The Commission anticipates that the acquirer of ETNG will open additional interconnections with trunklines that currently intersect with the ETNG system so as to provide customers with alternative routes for gas supply. The tolling provision will give customers the option of using these new sources if they so choose. The proposed order also contains ancillary provisions regarding VKGC which are in effect in the event Sonat's Destin interest is sold to a natural gas producer. The sale of Sonat's interest to a producer could result in Destin's being less than fully competitive in certain instances in which the producer elected to serve its own producing interests by reserving one part of the Destin system at the expense of independent producers seeking access to certain other parts of the Destin system. To remedy the potential for the divestiture to have this anticompetitive result, the proposed consent order requires El Paso to cause VKGC to adhere to benchmarks established by competition between VKGC and Destin. Specifically, the proposed order requires El Paso to cause VKGC to allow any shipper to obtain access to VKGC, which would be at the shipper's expense if any construction of pipe is required, and to allow any other pipeline to interconnect with VKGC, at the expense of the pipeline requesting the connection. The proposed consent prohibits El Paso from engaging in discrimination in scheduling, rates and terms and conditions of service on VKGC. The connecting pipeline can elect to submit a dispute regarding the terms and conditions of a connection to binding arbitration. El Paso is required to publish the arbitration clause in the order on Leviathan's electronic web site and to incorporate it into further contracts with shippers and connecting pipelines. El Paso is also required to notify the Commission of arbitration proceedings initiated under the proposed order. The requirement to provide open and non-discriminatory access to VKGC may be suspended upon a showing by El Paso that at least one-third of the membership interest in Destin is controlled by a person who does not have an interest in wells or leases in certain areas of the Gulf of Mexico. V. Opportunity for Public Comment The proposed consent order has been placed on the public record for 30 days for receipt of comments by interested persons. Comments received during this period will become part of the public record. After 30 days, the Commission will again review the proposed consent order and the comments received and will decide whether it should withdraw from the agreement or make the proposed consent order final. By accepting the proposed consent order subject to final approval, the Commission anticipates that the competitive problems alleged in the complaint will be resolved. The purpose of this analysis is to invite public comment on the proposed consent order in order to aid the Commission in its determination of whether to make the proposed consent order final. This analysis is not intended to constitute an official interpretation of the proposed consent order nor is it intended to modify the terms of the proposed consent order in any way. Endnotes: 1. The HHI is a measurement of market concentration calculated by summing the squares of the individual market shares of all the participants. |