Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

U.S. v. ENOVA CORP.

June 30, 2000

UNITED STATES OF AMERICA, PLAINTIFF,
V.
ENOVA CORPORATION, DEFENDANT.



The opinion of the court was delivered by: Roberts, District Judge.

  MEMORANDUM OPINION

This complaint was brought by the Justice Department to enjoin the merger of a California electrical utility and California's dominant natural gas transportation and storage company. The parties filed a consent decree along with the complaint. The Justice Department has moved for entry of final judgment which would permit the merger to be consummated subject to the conditions set forth in the consent decree. Because I find that entry of final judgment is in the public interest, the Justice Department's motion will be granted and the proposed final judgment will be entered.

BACKGROUND

On October 12, 1996, defendant Enova Corporation ("Enova"), entered into an Agreement and Plan of Merger and Reorganization with Pacific Enterprises ("Pacific"). On March 9, 1998, the Justice Department filed this complaint pursuant to Section 15 of the Clayton Act, as amended, 15 U.S.C. § 25 (1994), alleging that the Enova/Pacific merger would violate Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18.

I. The Merger and Its Potential Anticompetitive Effect

The gravamen of the government's complaint is that a merger between Enova and Pacific would give the merged entity ("PE/Enova") both the ability and incentive to raise electricity prices in California and injure competition in California's electricity generation market. Enova owns one of California's three major electric utilities California,*fn1 selling electricity through plants that run on coal, gas, nuclear power, and hydropower. (Compl. at ¶ 1.) Among Enova's assets are two lowcost gas-fired power plants — the Encina and South Bay electricity generation facilities — which run nearly year-round. (Competitive Impact Stmnt. at 9.) The complaint alleges that Pacific, through its wholly-owned subsidiary Southern California Gas Company ("SoCalGas"), operates an intrastate pipeline system that gives Pacific a monopoly over natural gas transportation and storage services in southern California. (Compl. at ¶ 2.) By virtue of its monopoly power over gas transportation and storage, Pacific can control the supply of gas and in turn the price of gas. (Id.) An increase in the price of gas increases the cost of operating gas-fired power plants. (Id.)

The complaint further alleges that, of the various types of power plants, gas-fired plants are generally the most costly to operate. (Id. at ¶ 3.) During periods of high-demand for electricity,*fn2 when the use of gas-fired plants is most prevalent, the cost of running gas-fired plants can dictate the cost of electricity in California. (Id.)*fn3 According to the complaint, if an electrical utility were able to keep the costs of operating gas-fired plants low, it would have an incentive to raise electricity prices because the resulting increase in revenue collected by the utility would outpace the higher cost of running the gas-fired plants. (Id.) This projected increase in profit margin is particularly likely given the high inelasticity of demand for electricity,*fn4 which means that the utility could increase the price of electricity without risking the loss of price-sensitive customers to competitors. (Id.)

Prior to the PE/Enova merger, Pacific's monopoly over natural gas transmission gave it the power to constrict the supply of natural gas to gas-fired plants,*fn5 thereby raising the price of natural gas and in turn the price of electricity. However, Pacific had little incentive to pursue this course because it was not selling electricity and thus would not benefit from higher electricity prices.*fn6 Conversely, Enova, as the owner of low-cost electricity generation facilities, had the incentive to raise electricity prices, but lacked the ability to do so because it could not alter natural gas prices. The merger between Pacific and Enova means that PE/Enova's ownership of low-cost gas-fired plants would enable it to profit handsomely from any increase in electricity prices, substantially offsetting any loss in gas transmission and distribution sales. (Id. at ¶ 24.) Therefore, the complaint alleges, if Pacific and Enova are permitted to merge, PE/Enova would have both the ability and the incentive to limit the supply of natural gas to competing gas-fired generators, thereby increasing the price of operating gas-fired plants, and in turn raising the price of electricity in California during periods of high demand. (Id. at ¶¶ 4, 24.) The complaint further alleges that PE/Enova's ability to manipulate the market clearing price of electricity would substantially curtail competition in California's electricity generation market. (Id.) It is also highly unlikely that natural market forces could counteract these effects because of the significant entry barriers to the markets for interstate natural gas transportation and electric power generation.*fn7

II. The Proposed Entry of Final Judgment

As is often the case in modern antitrust enforcement, the Justice Department filed together with its complaint a stipulation and order pursuant to which the parties consented to entry of a proposed final judgment aimed at remedying the alleged anticompetitive effects of the merger. The parties' proposed final judgment embodies a dual-pronged solution to the dilemma posed by the PE/Enova merger which focuses on eliminating PE/Enova's incentive to raise electricity prices. First the consent decree requires Enova to divest its two low-cost gas-fired power plants, the Encina and South Bay electricity generation facilities,*fn8 to a purchaser or purchasers acceptable to the United States in its sole discretion. (Proposed Final J. at §§ II (F), IV(A).)*fn9 Second, the proposed final judgment limits PE/Enova's ability to acquire other low-cost gas-fired plants to replace the divested assets by requiring PE/Enova to seek prior approval from the United States before acquiring any such assets,*fn10 and by monitoring PE/Enova's ability to enter into other power management contracts.*fn11 (Proposed Final J. at § V(C)(4)-(5).) Accordingly, the Justice Department contends that the double-fisted remedy of divestiture and prior approval/contract monitoring sufficiently protects southern California's electricity market from any potentially anticompetitive tactics PE/Enova might employ.

III. Public Comments

Pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C. § 16 (b)-(h), known as the Tunney Act, the Justice Department published the proposed final judgment along with a competitive impact statement in the Federal Register on June 18, 1998. The public was then given 60 days in which to comment on the proposed final judgment. Only two parties, Southwest California Edison Company ("SCE") and the City of Vernon ("Vernon"), filed comments.

A. SCE's Comments

SCE is a direct competitor of Enova's for electricity sales in southern California. (SCE Comments at 5 n. 3.) SCE argued that the proposed final judgment only forecloses one avenue by which PE/Enova could increase the price of electricity while leaving others wide open. SCE maintained that, notwithstanding the remedies contained in the proposed final judgment, PE/Enova would still be able to enter into one or more transactions which would give it the incentive to exert its market power over natural gas transmission to affect the electricity market. (Id. at 3-4.) According to SCE, PE/Enova would still be permitted by the proposed final judgment to acquire new or repowered/rebuilt generating facilities, to enter into tolling agreements, to purchase electrical output from the divested plants, and to enter into financial contracts (i.e. derivatives) tied to the prices in the California electric market. (Id. at 4.) In SCE's view, the proposed final judgment should have eliminated PE/Enova's market power by requiring Pacific to divest its natural gas assets, as opposed to eliminating its incentives to exercise that power by mandating divestiture of Enova's low-cost gas-fired plants. (Id. at 5, 14-45.) SCE therefore proposed the following alternative remedies: (1) that the merger be rescinded; (2) that Pacific's natural gas pipeline be divested; (3) that the pipeline be controlled by an independent system operator; (4) that PE/Enova be barred from trading financial instruments for Southern California electricity markets. (Id. at 6.)

SCE also moved for leave to file an amicus brief with this Court and for leave to orally participate in a Tunney Act hearing However, SCE subsequently withdrew its motion, indicating that it had "reconsidered its position in this matter" and therefore no longer opposed entry of final judgment. (Stmnt. of Proposed Amicus [SCE] Concerning Entry of Final J.)

B. Vernon's Comments

Vernon operates its own municipal electrical utility, which includes a gas-fired plant and a municipal gas utility. (Vernon comments at 1.) It objected to the proposed consent decree on the ground that the PE/Enova merger would "alter and damage the potential for competition in the California natural gas market" by "combin[ing] the two largest natural gas transmission and distribution companies in southern California." (Id.) Vernon pointed out that there had been rumors that another natural gas pipeline would be built through southern California to compete with SoCalGas, Pacific's wholly-owned subsidiary. (Id. at 2.) According to Vernon, Enova's electrical utility was considered the largest potential "anchor" customer of this new pipeline. (Id.) The PE/Enova merger, however, would purportedly "cement a permanent alliance" between SoCalGas and Enova, thereby depriving the new pipeline of its potential anchor. (Id.)

IV. Justice Department's Responses to the Public Comments

On January 11, 1999, the Justice Department responded to SCE and Vernon's comments.*fn12 The government argued that SCE's comments "misse[d] the mark, because each of the potential transactions it lists is a transaction that Pacific could engage in whether or not it merges with Enova." (Pl.'s Resp. to Public Comments at 6) (emphasis in original). In other words, once electricity deregulation was accomplished, Pacific already had the ability and incentive to exploit SoCalGas's pipeline monopoly by engaging in the types of transactions enumerated by SCE. The proposed final judgment by contrast, was designed to correct for the potential anticompetitive effects specifically caused by the PE/Enova merger itself as opposed to deregulation's general impact on southern California's electricity market. (Id. at 7.) The consent decree purportedly accomplishes this result by requiring Enova to divest its low-cost generating assets which otherwise would have given PE/Enova the incentive to use its natural gas pipeline monopoly to distort the market for electricity during periods of high demand, and by installing checks to prevent PE/Enova from acquiring or controlling other assets which might give rise to the same anticompetitive incentives. (Id. at 7-8.)

As for Vernon's concern about the potentially deleterious effect of the PE/Enova merger on southern Califonia's natural gas transmission market, the government countered that its complaint "does not allege violations of the natural gas transmission market," but rather seeks to remedy potential harm in the electricity market. (Id. at 10.) Accordingly, the government summarily rejected Vernon's objections as "not relevant to this proceeding." (Id.)

DISCUSSION

I. Standard of Review

Under the Tunney Act, the court must "determine that the entry of judgment is in the public interest." 15 U.S.C. § 16 (e). In making this public interest determination, the court may consider:

(1) the competitive impact of such judgment, including termination of alleged violations, provisions for enforcement and modification, duration or relief sought, anticipated effects of alternative remedies actually considered, and other considerations bearing upon the adequacy of such judgment;
(2) the impact of entry of such judgment upon the public generally and individuals alleging specific injury from the violations set forth in the complaint including consideration of the public benefit, if any, to be derived from a determination of the issues at trial

Id.

As the D.C. Circuit has held, the Tunney Act allows courts to weigh, among other things, the relationship between the allegations set forth in the government's complaint and the remedy imposed by the proposed final judgment, whether the proposed final judgment is overly ambiguous, whether the enforcement mechanisms it employs are adequate, and whether the proposed final judgment may affirmatively prejudice third parties. See United States v. Microsoft Corp., 56 F.3d 1448, 1461-62 (D.C.Cir. 1995) (per curiam). The court may not, however, "make a de novo determination of facts and issues" in conducting its public interest inquiry. United States v. Western Elec. Co., 993 F.2d 1572, 1577 (D.C.Cir.), cert. denied, 510 U.S. 984, 114 S.Ct. 487, 126 L.Ed.2d 438 (1993) (internal quotation and citation omitted). Rather, "[t]he balancing of competing social and political interests affected by a proposed antitrust decree must he left, in the first instance, to the discretion of the Attorney General." Id. (internal quotation and citation omitted). The court should therefore reject the proposed final judgment only if "it has exceptional confidence that adverse antitrust consequences will result — perhaps akin to the confidence that would justify a court in overturning the predictive judgments of an administrative agency." Microsoft. 56 F.3d at 1460 (internal quotations and citation omitted).

In conducting its inquiry, the court is not required to hold a hearing or conduct a trial. See 119 Cong.Rec. 24,598 (1973); United States v. Airline Tariff Pub. Co., 836 F. Supp. 9, 11 n. 2 (D.D.C. 1993). The Tunney Act expressly allows the court to make its public interest determination on the basis of the competitive impact statement and response to comments alone. A court may, in its discretion, invoke additional procedures when it determines such proceedings may assist in the resolution of issues raised by the comments. See H.R.Rep. No. 93-1463, at 8-9 (1974), reprinted in U.S.S.C.A.N. 6535, 6539. However, because there were only two commenters and one of the two has since withdrawn its objections to the merger, there is no compelling reason to hold a hearing in this matter.

II. Analysis

The proposed final judgment seeks to avert the potential anti-competitive effects of the PE/Enova merger on California's electricity market. The PE/Enova merger is a "vertical" merger because it involves the combination of the "upstream" segment of a business with a "downstream" segment. The mere fact that the merged company possesses market power in either the upstream or downstream market does not necessarily mean that competitive harm will result from the merger. See IIIA Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 756 (1996). While a so-called "horizontal" merger between two competitors in the same industry automatically increases market concentration by eliminating a competitor, vertical mergers do not in and of themselves decrease the number of competitors in any one market. See id. at ¶ 763c. Indeed, vertical mergers often promote efficiencies by consolidating input and output operations under one umbrella. See generally id. at ¶¶ 755-59 (1996). Vertical mergers do, however, raise antitrust concerns when the merged entity is willing and able to leverage its power in one market to raise prices and/or eliminate competition in another. See id. at ¶ 756. Here, the danger is that PE/Enova will use its monopoly position in the upstream segment of its business (natural gas delivery) to raise prices and harm competition in the downstream segment of its business (electrical power generation).

The proposed final judgment focuses on limiting PE/Enova's incentive to engage in this type of leveraging rather than on its ability to do so. All sides agree that the proposed final judgment will not decrease Pacific's preexisting market power in southern California's natural gas transmission market. Rather, the proposed final judgment seeks to eliminate PE/Enova's new incentive to use its monopoly over natural gas transmission in southern California to limit competition and raise prices in California's electricity generation market. The fundamental question presented by the proposed final judgment is whether Enova's divestiture of its low cost gas-fired generators coupled with the implementation of a system of prior approvals and contract monitoring sufficiently eliminates PE/Enova's incentive to raise prices and limit competition in the electricity generation market. I find that it does.

Whether the ends of antitrust law might better be served, as SCE and Vernon have suggested, by attacking PE/Enova's natural gas transmission monopoly is not for this Court to decide. The D.C. Circuit has held that a court may not reject a remedy simply because it may not be, in the court's view, the "best" remedy available. Microsoft, 56 F.3d at 1460 (D.C.Cir. 1995). Rather, "a proposed consent decree must be approved even if it falls short of the remedy the court would impose on its own, as long as it falls within the range of acceptability or is `within the reaches of the public interest.'" United States v. American Tel. & Tel. Co., 552 F. Supp. 131, 151 (D.D.C. 1982) (citations omitted) (quoting United States v. Gillette Co., 406 F. Supp. 713, 716 (D.Mass. 1975)), aff'd sub. nom. Maryland v. United States, 460 U.S. 1001, 103 S.Ct. 1240, 75 L.Ed.2d 472 (1983).

The proposed final judgment "falls within the range of acceptability" because it sufficiently curtails PE/Enova's incentive to abuse its market power over southern California's natural gas transmission market in order to raise electricity prices and/or diminish competition in southern California's electricity generation market. This result is accomplished by requiring Enova to divest those assets which would provide the largest profit margins if the price of electricity rose and by imposing a rigorous system of prior approvals and contract monitoring to assure that PE/Enova does not take steps to undo the effects of the divestiture. It is plainly not for the Court to second-guess the government's predictions concerning the impact of the merger or the proposed remedies. See Microsoft, 56 F.3d at 1460-61. Furthermore, any potentially deleterious effect that the merger may have on California's natural gas market is, as the government points out, beyond the allegations made and issues raised in the complaint*fn13 and is therefore beyond the scope of this Court's review. See id. at 1459-60.

It is equally important to note that PE/Enova will remain subject to ongoing regulatory review. Indeed, the PE/Enova merger has already run the gauntlet of regulatory approvals, having obtained the blessing of no less than four regulatory bodies subject to various conditions intended to mitigate potential anticompetitive effects. See Sempra Energy, Mem.Op. and Order Authorizing Acquisition of Public Utility Companies and Granting Exemption from Registration, No. 35-26890, 67 S.E.C. Docket 994 (June 26, 1998); Southern Cal. Edison Co. v. San Diego Gas & Elec. Co., 83 Fed. Energy Reg. Comm'n Rep. (CCH) ¶ 61,199 (May 27, 1998); Re Pacific Enterprises, 1998 WL 211974, 184 P.U.R.4th 417 (1998); 81 Cal.Ops.Cal. Att'y Gen. 1 (1998).*fn14 There is also nothing in the proposed final judgment limiting the ability of the Justice Department or any other federal agency to investigate and challenge PE/Enova's future actions should the circumstances warrant. For instance, should PE/Enova attempt to manipulate the commodities markets by purchasing derivatives tied to the price of electricity as SCE once predicted, the Commodity Futures Trading Commission would have jurisdiction under the Commodity Exchange Act, 7 U.S.C. § 1-25, to address such an abuse.

CONCLUSION

I am not firmly convinced that entry of the proposed final judgment would result in adverse antitrust consequences. PE/Enova's divestiture of its low-cost gas-fired generators coupled with the system of prior approvals and contract monitoring should reduce PE/Enova's incentive to engage in the anticompetitive practices alleged in the complaint. Entry of the proposed final judgment is therefore in the public interest. Plaintiff's motion for entry of final judgment will be granted and the proposed final judgment will be entered.

FINAL JUDGMENT

WHEREAS Plaintiff United States of America (hereinafter "United States"), having filed its Complaint herein on March 9, 1998, and Plaintiff and Defendant, by their respective attorneys, having consented to the entry of this Final Judgment without trial or adjudication of any issue of fact or law herein, and without this Final Judgment constituting any evidence against or an admission by any party with respect to any issue of law or fact herein;

AND WHEREAS Defendant has agreed to be bound by the provisions of this Final Judgment pending its approval by the Court;

AND WHEREAS the essence of this Final Judgment is divestiture of assets to ensure that competition, as alleged in the Complaint, is not substantially lessened;

AND WHEREAS Plaintiff requires Defendant to make certain divestitures for the purpose of remedying the loss of competition alleged in the Complaint;

AND WHEREAS Defendant has represented to Plaintiff that as to the divestiture ordered herein Defendant will later raise no claims of hardship or difficulty as grounds for asking the Court to modify any of the divestiture provisions contained below;

NOW, THEREFORE, before the taking of any testimony, and without trial or adjudication or admission of any issue of fact or law herein, and upon consent of the parties hereto, it is ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.