El Paso Energy Corporation; Analysis To Aid Public Comment

FEDERAL TRADE COMMISSION

[File No. 991 0178]

El Paso Energy Corporation; Analysis To Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed consent agreement.

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SUMMARY: The consent agreement in this matter settles alleged

violations of federal law prohibiting unfair or deceptive acts or

practices or unfair methods of competition. The attached Analysis to

Aid Public Comment describes both the allegations in the draft

complaint that accompanies the consent agreement and the terms of the

consent order--embodied in the consent agreement--that would settle

these allegations.

DATES: Comments must be received on or before November 23, 1999.

ADDRESSES: Comments should be directed to: FTC/Office of the Secretary,

Room 159, 600 Pennsylvania Ave., NW, Washington, DC 20580.

FOR FURTHER INFORMATION CONTACT: Richard Parker or Phillip Broyles,

FTC/H-374, 600 Pennsylvania Ave., NW, Washington, DC 20580 (202) 326-

2574 or 326-2805.

SUPPLEMENTARY INFORMATION: Pursuant to section 6(f) of the Federal

Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46 and Sec. 2.34 of the

Commission's rules of practice (16 CFR 2.34), notice is hereby given

that the above-captioned consent agreement containing a consent order

to cease and desist, having been filed with and accepted, subject to

final approval, by the Commission, has been placed on the public record

for a period of thirty (30) days. The following Analysis to Aid Public

Comment describes the terms of the consent agreement, and the

allegations in the complaint. An electronic copy of the full text of

the consent agreement package can be obtained from the FTC Home Page

(for October 22, 1999), on the World Wide Web, at ``http://www.ftc.gov/

os/actions97.htm.'' A paper copy can be obtained from the FTC Public

Reference Room, Room H-130, 600 Pennsylvania Avenue, NW, Washington, DC

20580, either in person or by calling (202) 326-3627.

Public comment is invited. Comments should be directed to: FTC/

Office of the Secretary, Room 159, 600 Pennsylvania Ave., NW,

Washington DC 20580. Two paper copies of each comment should be filed,

and should be accompanied, if possible, by a 3\1/2\ inch diskette

containing an electronic copy of the comment. Such comments or views

will be considered by the Commission and will be available for

inspection and copying at its principal office in accordance with

Sec. 4.9(b)(6)(ii) of the Commission's rules of practice (16 CFR

4.9(b)(6)(ii)).

Analysis of the Draft Complaint and Proposed Consent Order To Aid

Public Comment

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

[[Page 59180]]

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.

A. Transportation of Natural Gas Out of the Producing Fields

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 area 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 (commoly referred to as ``HHI'') \1\ in

the geographic market by over 1000 points to over 4400.

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\1\ The HHI is a measurement of market concentration calculated

by summing the squares of the individual market shares of all the

participants.

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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.

B. Transportation of Natural Gas Into Gas Consuming Areas

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, transport

[[Page 59181]]

natural gas for many local gas distribution utilities in east 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 concerned, 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 over 5700. In certain other submarkets, the acquisition would

increase the HHI by over 4500 points to 1000.

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 market, 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\1/

2\ 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 is 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.

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By direction of the Commission.

Donald S. Clark,

Secretary.

[FR Doc. 99-28552 Filed 11-1-99; 8:45 am]

BILLING CODE 6750-01-M