The Federal Trade Commission has accepted a proposed consent agreement that would allow the $6 billion merger of El Paso Energy Corporation and Sonat Inc., while ensuring that competition is maintained in markets for natural gas transportation out of the Gulf of Mexico and into the southeastern United States.
Under the terms of the proposed consent, El Paso would be required to divest Sea Robin Pipeline Company, a wholly-owned subsidiary of Sonat, and Sonat's one-third ownership interest in Destin Pipeline Company, L.L.C. Sea Robin and Destin are large natural gas pipelines operating in the Gulf of Mexico off the coast of Louisiana. El Paso would also be required to sell its East Tennessee Natural Gas Company (ETNG), which owns a natural gas pipeline system serving customers in eastern Tennessee and northern Georgia.
"The consent order would require substantial divestitures which will ensure continued competition among natural gas transporters in these parts of the country," said FTC's Bureau of Competition Director Richard G. Parker. "El Paso and Sonat are major players in these markets and the customers they serve will benefit from the divestitures and from the other provisions of the order."
According to the Commission's complaint, both El Paso and Sonat are involved in the transportation of natural gas in the east-central Gulf of Mexico, west-central Gulf of Mexico, and eastern Tennessee and northern Georgia. Natural gas pipeline capacity out of the west-central Gulf of Mexico, an area off the western Louisiana coast, is approximately 2,900 million cubic feet per day. El Paso and Sonat each has substantial pipeline interests in this area. El Paso owns a 50 percent share of Stingray Pipeline, a large natural gas transmission system extending more than 100 miles into the eastern Louisiana Gulf, where it competes with Sonat's Sea Robin Pipeline. Both Stingray and Sea Robin transport natural gas from wells in this area of the Gulf to shore.
Pipeline capacity out of the east-central Gulf of Mexico, an area off the eastern Louisiana coast, is approximately 3,050 million cubic feet per day. El Paso and Sonat each has substantial pipeline interests in this area, as well. Sonat's Southern Natural pipeline; Destin Pipeline, which is operated and one-third controlled by Sonat; El Paso's Tennessee Gas Pipeline; and El Paso-controlled Viosca Knoll Gathering Company (VKGC), are direct and substantial competitors transporting natural gas out of the eastern Louisiana Gulf of Mexico to shore.
El Paso and Sonat are also direct and substantial competitors in transporting natural gas into eastern Tennessee and northern Georgia, including transporting gas for local delivery companies serving Atlanta, Chattanooga and Knoxville. Customers in eastern Tennessee and northern Georgia purchase contracts for the transportation and delivery of more than 750 million cubic feet of natural gas per day.
The FTC's complaint alleges that the post-merger market in these three areas would be highly concentrated and that the acquisition would substantially reduce competition or tend to create a monopoly in the transportation of natural gas by eliminating both actual and potential competition between El Paso and Sonat. In addition, the complaint alleges that, due to the cost of developing and placing natural gas pipelines, entry into the marketplace by additional competitors would not be timely or sufficient to prevent the anticipated anti-competitive effects of the merger.
To address concerns regarding the potential for reduced competition offshore, the proposed consent order would require El Paso to divest Sea Robin, a wholly-owned subsidiary of Sonat, and to divest Sonat's one-third ownership interest in Destin. To address concern on the southeastern onshore consuming areas, the proposed order would require El Paso to divest ETNG, the El Paso pipeline system that serves customers in eastern Tennessee and northern Georgia.
The proposed consent order would require the divestiture of these assets within six months of the date on which the consent is signed, at no minimum price to a buyer, and in a manner, that is approved by the Commission. If the divestiture has not occurred within this time, the Commission may appoint a trustee to divest the assets. The proposed order would not require that El Paso present the Commission with the buyer before the acceptance of the consent agreement for public comment (an "up-front" buyer), because El Paso has satisfied the Commission that consumers would not be harmed by a post-order divestiture.
The proposed order also would contain ancillary provisions related to both the onshore and offshore markets. Customers on the ETNG system have transportation and/or storage contracts with ETNG and Tennessee Gas Pipeline Co., another El Paso subsidiary. Many of these contracts have renewal election deadlines which will run in the midst of the ETNG divestiture process. The proposed order would extend the renewal deadline for these contracts until 60 days after the divestiture of ETNG. The purpose of this extension is to allow customers to know the identity of the acquirer of ETNG before they commit to new contracts for natural gas transportation and storage.
The proposed order would contain additional ancillary provisions which would apply to El Paso's operation of VKGC in the event that Sonat's Destin interest is sold to a natural gas producer. Such a sale 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 avoid this anticompetitive result, the proposed consent order would require El Paso to cause VKGC to adhere to benchmarks established by competition between VKGC and Destin. Specifically, the proposed order would require 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 would prohibit 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 would be required to publish the order's arbitration clause on Leviathan's electronic web site and to incorporate it into further contracts with shippers and connecting pipelines. El Paso also would be 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.
A summary of the proposed consent agreement will be published in the Federal Register shortly. The agreement will be subject to public comment for 30 days, after which the Commission will decide whether to make it final. Comments should be addressed to the FTC, Office of the Secretary, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.
The Commission vote to accept the proposed consent agreement was 4-0.
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 agreement, and an analysis of the proposed consent order 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; 877-FTC-HELP (877-382-4357); TDD for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.
Richard G. Parker
Bureau of Competition
Phillip L. Broyles
Bureau of Competition
(FTC File No. 991-0178)