FTC challenge to Equitable Resources' acquisition of Peoples Natural Gas

INTRASTRATE ACQUISITION OF PEOPLE'S NATURAL GAS CO. BY EQUITABLE RESOURCES, INC. (RECENT MERGER & FEDERAL TRADE COMMISSION)

It is reported in the work entitled: "FTC Complaint May Seek to Erode 'State Action' Immunity of Utilities" that the Federal Trade Commission (FTC) in recent filings "may be an attempt to weaken the State Action defense that has protected a broad range of activities by public utilities from the antitrust laws." (Ewing, 2007) Ewing additionally reports that the Federal Trade Commission (FTC) filed a complaint on March 15, 2007 that issued a challenge of the merger that was proposed between Equitable Resources, Inc. And the Peoples Natural Gas Company, a subsidiary of Dominion Resources, Inc. The complaint is stated to allege that "the proposed transaction violates Section 5 of the Federal Trade Commission Act and Section 7 of the Clayton Act." (2007)

The merger was claimed by the Federal Trade Commission (FTC) to be anticompetitive since were the merger "consummated, it would eliminate competition between Equitable and Dominion Peoples for non-residential gas distribution customers in overlapping territories." (Ewing, 2007) These customers had previously had a choice between Equitable and Dominion Peoples and consummation of these two competitors would result in a loss of an alternative and ultimately the increase in "natural gas distribution rates that are subject to the jurisdiction of the Pennsylvania Public Utility Commission (PAPUC)." (Ewing, 2007)

BACKGROUND TO THE STUDY

The State Action doctrine is that which served as a shield to the "activities of utilities from federal antitrust scrutiny" in the following ways:

(1) The challenged restraint on trade or competition is one clearly articulated and affirmatively expressed as state policy; and (2) The policy is actively supervised by the state itself. (Ewing, 2007)

Ewing cites the case of: California Retail Liquor Dealers Association v. Midcal Aluminum, Inc. 445 U.S. 97, 105 (1980).

Ewing (2007) states that "State Action immunity is an affirmative defense to claims of antitrust violations and is grounded on principles of federalism and state sovereignty" and cites the case of: "FTC v. Ticor Title Insurance Co., 504 U.S. 621 (1992). It is stated by Ewing that in the case of: Yeager's Fuel, Inc. v. Pennsylvania Power & Light Co., 22 F.3d 1260 (3rd Cir. 1994), "the Third Circuit ruled that PP&L was immune from antitrust liability for offering developers grants and incentives and for offering consumers a special rate for installing high-efficiency electric heating systems. The Court found that PP&L was immune from antitrust liability because Pennsylvania had a clearly articulated and affirmatively expressed policy of promoting load management and energy conservation programs and that the PAPUC actively supervised utility rates and incentive programs." (2007)

Other circuit court decisions which are stated to have applied the State Action immunity in protection of utility companies from liability related to antitrust when challenges are issued to the state-approved rates including:

(1) Lease Light, Inc. v. Public Service Co. Of Oklahoma, 849 F.2d 1330 (10th Cir. 1988), the court found that the State Action doctrine insulated the utility from antitrust liability where the regulatory agency approved lower rates than initially proposed by the company.

(2) TEC Cogeneration, Inc. v. Florida Power & Light Co., 76 F.3d 1560 (11 Cir.), modified on reh'g, 86 F.3d 1028 (11th Cir. 1998), the utility overcame an antitrust challenge based on the State Action doctrine, where the state regulatory agency conducted extensive, contested administrative proceedings prior to approving the utility's rates. (Ewing, 2007)

OVERVIEW OF GAS UTILITY MARKET -- WESTERN PA

The utility market in Western Pennsylvania is unique because it is the only gas utility market where there are overlapping service territories in the gas utility market. There are five utilities in operation in this area however their operations are to varying degrees with some areas containing three different utility company gas lines under the same streets.

Distribution rates of each of the utility's distributions rates are regulated with PAPUC capping the maximum allowable rates however the gas supply portion is unregulated with freedom among customers in choosing gas supply and gas distribution services from different utilities. At the time of the proposed merger the gas bill was typically 20% for distribution and 80% for supply. In some areas the utilities offer distribution of gas services at less-than-allowable rates to industrial and commercial customers. PAPUC ordered the gas supply market deregulated in 1999.

I. COMPLAINT FOR TEMPORARY RESTRAINING ORDER

After the merger was approved on April 13, 2007 by the Pennsylvania Public Utility Commission (PAPUC) the Federal Trade Commission (FTC) filed its 'Complaints for a Temporary Restraining Order (TRO) and Preliminary Injunction in Federal Court. Ewing (2007) reports that the TRO Complaint "mirrors the claims advanced by the FTC in its initial compliant and threatens to undermine the State Action defense." (Ewing,2 007)

Ewing relates that the complaint launched by the Federal Trade Commission (FTC) on March 15, 2007 against Equitable and Dominion Peoples "appears to be a departure from the usual interpretation of the State Action doctrine." (2007) A PAPUC Administrative Law judge issued, on the 15th of March 2007 an initial decision which approved the merger however, that decision is inclusive of a discussion that is lengthy concerning the impact of the gas-on-gas distribution competition loss.

II. ANSWER FILED IN COURT BY EQUITABLE/DOMINION PEOPLES

In April of the same year Equitable and Dominion Peoples filed a joint Answer responding to the complaint filed by the Federal Trade Commission (FTC) which asserted that "among other things, the State Action affirmative defense." (Ewing, 2007) The FTC staff filed a Motion to Strike on April 11, 2007 with the Federal Trade Commission (FTC), the affirmative defense of State Action raised by Equitable and Dominion Peoples. Upon approval by the PAPUC, the TRO Complaint was filed by the FTC in the U.S. District Court for the Western District of Pennsylvania.

Ewing (2007) states that the manner in which the Courts and Federal Trade Commission (FTC) handle the issues that these filing raised will hold significant implications for utility companies and the setting of rates and structuring of mergers and acquisition methods as well. Stated as an obvious concern of all utility companies is the State Action doctrine as it is traditionally applied.

It is reported in the work of Schlossberg (2004) entitled: "Mergers and Acquisitions: Understanding the Antitrust Issue" that Congress has "in a few instances…given agencies other than the DOJ and Federal Trade Commission (FTC) some, or exclusive, jurisdiction over mergers and acquisitions. For the most part, Congress has done so explicitly, making clear the extent to which jurisdiction is to be exercised exclusively or concurrently. When the relevant statue is silent though the courts must determine jurisdiction." (Schlossberg, 2004)

It is related that the Supreme Court recently established in Credit Suisse Securities (USA) LLC v. Billing recently established, "outside the mergers and acquisitions context…a standard for courts to apply when the statute is silent as to whether a particularly regulatory scheme precludes the application of the antitrust laws to particular conduct. The case did not involve mergers and acquisitions but rather conduct regulated by the Securities and Exchange Commission (SEC)." (Schlossberg, 2004)

The ruling of the Supreme Court stated that since the "securities laws did not explicitly state whether they preclude the application of the antitrust laws to the conduct at hand the courts must determine whether there is a 'plain repugnancy' or 'clear incompatibility' between the securities and antitrust laws." (Schlossberg, 2004)

Four factors are stated to have been considered by the Court in this determination as follows:

(1) whether the conduct falls squarely within the securities regulations;

(2) whether the SEC has clear and adequate authority to regulate the conduct;

(3) whether the conduct is subject to active and ongoing agency regulation; and (4) whether there is a serious conflict between the securities and antitrust regulations. (Schlossberg, 2004)

The test when applied to the "conduct at issue in that case" resulted din the Supreme Court holding that "the securities laws precluded the application of the antitrust laws." (Schlossberg, 2004) Schlossberg (2004) states that the Federal Energy Regulatory Commission (FERC) has no regulatory authority over acquisitions of voting securities of natural gas companies, many of which have been successfully challenged by the Federal Trade Commission (FTC).

The extent of FERC's authority over merger and acquisitions is limited to Section 7(c) of the Natural Gas Act, which prohibits the operation of acquired assets without a certificate of public convenience and necessity." (Schlossberg, 2004) It was held however by the Supreme Court that "Section 7(c) does not deprive the federal courts of jurisdiction to hear the case brought under Section 7 of the Clayton act with respect to the natural gas industry." (Schlossberg, 2004) Resulting from this is the FTC and the Division being at freedom to issue a challenge of transactions that involve natural gas companies including those that the FERC approved previously.

Under Section 203 of the Federal Power ACT, FERC is stated to hold the responsibility to review and theorized "proposed mergers of electric utilizes falling in its jurisdiction and as well FERC "is empowered to approve mergers 'consistent with the public interest'…" and additionally may impose conditions of the approval upon the basis of "terms and conditions necessary or appropriate to secure the maintenance of adequate service and the coordination in the public interest of facilities subject to its jurisdiction." (Schlossberg, 2004)

FERC analyzed while making a review of the electric utility mergers proposition, the transaction being proposed "likely effect" on (1) competition;

(2) rates; and (3) regulation. (Schlossberg, 2004)

There are stated to be "no antitrust exemptions for transactions subject to FERC review and such mergers are regularly reviewed by either the Federal Trade Commission (FTC) or the Division." (Schlossberg, 2004) The Securities and Exchange Commission had previously held jurisdiction for reviewing acquisitions of stock of electric utility companies however, the authority provided under the Public Utilities Holding Company Act of 1935 was repealed in 2005.

SUMMARY & CONCLUSION

The objective of this work was to examine a recent merger and toward this end, this work examined the merger of Equitable Resources, Inc. And the Peoples Natural Gas Company, a subsidiary of Dominion Resources, Inc. And found that this merger was claimed by the Federal Trade Commission (FTC) to violate Section 5 of the Federal Trade Commission Act and Section 7 of the Clayton Act." (2007) The Court eventually ended the merger's implementation. This case related to State Action immunity and specifically as related to deregulation of already regulated industries such as utilities in that these companies may not legally merge under the guidelines of the Federal Trade Commission (FTC) in cases where their merging would effectively put an end to competition in the specific industry of the merger. This study found that broad application of this type of state action immunity would effectively serve to strengthen the already regulated structures and that the older entities within this system would continue to dominate the market as they have historically and traditionally done. There is conflict in various areas of governance and regulation in this area of the law.