STATE OF ILLINOIS, ex rel. Roland W. BURRIS,*
Attorney General of the State of Illinois, in its
рroprietary capacity, in its parens patriae capacity, and in
its representative capacity, Plaintiff-Appellant,
v.
PANHANDLE EASTERN PIPE LINE COMPANY, a Delaware corporation,
Defendant-Appellee.
No. 90-1231.
United States Court of Appeals,
Seventh Circuit.
Argued Jan. 7, 1991.
Decided June 4, 1991.
Rehearing and Rehearing In Banc
Denied Sept. 9, 1991.
John W. McCaffrey, Asst. Atty. Gen., Raymond J. Smith (argued), Edward J. Burke, Mary P. Burns, Burke, Smith & Williams, Clyde Kurlander, Illinois Commerce Comm'n, William C. Holmes, Freeborn & Peters, Chicago, Ill., David M. Lynch, Peoria, Ill., for plaintiff-appellant.
Paul H. LaRue (argued), Juris Kins, Gregory G. Wrobel, Andrew M. Gardner, and Mark D. Chapleau, Vedder, Price, Kaufman & Kammholz, Chicago, Ill., John A. Sieger, Christopher A. Helms, Irwin A. Bain, Eastern Pipe Line Co., Houston, Tex., for defendant-appellee.
Before FLAUM, RIPPLE and KANNE, Circuit Judges.
FLAUM, Circuit Judge.
The state of Illinois brought this antitrust suit on its own behalf and on behalf of a class of residential and commercial consumers of natural gas in central Illinois. The state alleges that the Panhandle Eastern Pipe Line Company violated federal and state antitrust laws in the early 1980s by refusing to transport natural gas purchased by its principal commercial customers (the local distribution companies that distribute gas to residential and most commercial and industrial end-users) through its pipelines. After a bench trial, the district court ruled that Panhandle's conduct was not anticompetitive. Illinois ex rel. Hartigan v. Panhandle Eastern Pipe Line Co.,
I. Background1
The late 1970s and early 1980s found the natural gas industry in the throes of deregulation. Regulation in the industry dated back to the 1930s when a handful of pipeline companies monopolized the purchase and distribution of natural gas. Congress had responded by regulating the pipelines and controlling natural gas prices at the wellhead. Under regulatiоn, pipelines typically purchased the gas from producers and resold it to their customers; "gas flow[ed] from producer to pipeline to distributor to consumer, with title passing at each change of possession." Pierce, Reconsidering the Roles of Regulation and Competition in the Natural Gas Industry, 97 HARV.L.REV. 345, 348 (1983). The pipelines thus traditionally bundled together two commodities--gas and pipeline transportation--for their customers. Their profit, however, derived solely from the return permitted by regulators on the transportation service; the commodity component of pipeline rates reflected only a pass through of the price paid by the pipeline for the gas.
Shortages plagued the natural gas market under regulation, leading Congress to reverse its course. In 1978, Congress embarked on a program of phased deregulation--embodied in the National Gas Policy Act (NGPA), 15 U.S.C. Secs. 3301-3432--that established a graduated series of increases in the maximum permissible price for natural gas and culminated in the complete termination of wellhead (producer) price regulation in 1985. See Mobil Oil Exploration v. United Distr. Co., --- U.S. ----,
As deregulation progressed, many pipelines entered into long-term contracts to purchase natural gas at high deregulated prices, anticipating continued shortages and continued growth in the demand for natural gas. Those prices were subject to little regulatory control, since FERC reviews pipeline gas acquisition costs only for "fraud or abuse," 15 U.S.C. Sec. 3431(c)(2), and permits pipelines to include "purchase gas adjustment" clauses (PGAs) in their contracts with distributors. Id. at 350. These clauses permit pipeline companies to adjust their rates regularly to reflect changes in the cost of the gas they purchase. Pierce, supra, at 350 n. 33.
The Panhandle Eastern Pipe Line Company was no exception. Panhandle's pipeline system stretches northeast from the Gulf of Mexico into Michigan, and during the early 1980s, Panhandle was the exclusive supplier of natural gas to 37 counties in central Illinois. Beginning in 1979, Panhandle launched an aggressive campaign to secure what at that time were still scarce, and expensive, gas supplies. Among its efforts to secure gas were two very expensive projects: Panhandle contracted through Trunkline Gas Company, a subsidiary pipeline, to purchase liquified natural gas from Algeria, and joined a partnership to construct pipelines to import gas from Canada.
Deregulation worked, however, and higher prices spurred increased production of natural gas. But as production was increasing, demand was decreasing because the prices of alternative fuels were dropping and energy conservation measures were intensifying. Despite warnings from its customers that demand was slacking, Panhandle continued to enter into long-term gas purchase contracts at the maximum prices permitted by the NGPA phase-out price levels. To compound the problem, Panhandle agreed to significant take-or-pay provisions2 in virtually all of its purchase contracts without demanding force majeure or other types of market-out clauses to limit their take-or-pay obligations. Increased production and reduced demand produced a glut of natural gas that depressed spot market prices far below the price ceilings established by the NGPA, and well below the levels mandated in Panhandle's contracts. In 1982, when the expensive gas from its Algerian and Canadian projects became available, Panhandle's costs increased dramatically, much to the chagrin of its customers.3 By 1984, Panhandle's rates were among the most expensive in the country.
Consequently, Panhandle's LDC customers (the parties focus on Central Illinois Light Company ("CILCO"), and so will we) began exploring the possibility of buying gas from sources other than Panhandle. Panhandle's contracts with these customers presented a huge obstacle, however, for Panhandle had a "sole supplier" provision in the contracts.4 This provision was part of Panhandle's FERC-approved "G tariff" rate schedule, which obligated Panhandle to use its best efforts to meet its customers' demands for gas and permitted customers to vary the quantity of gas purchased each month (demand for natural gas typically decreases substantially during the summer). In return, customers agreed to purchase their full requirements of gas from Panhandle. See Panhandle Eastern Pipe Line Co., 10 F.P.C. 185 (Opinion No. 214), modified, 10 F.P.C. 322 (1951), further modified, 13 F.P.C. 53 (1954) (Opinion 269), rev'd in part,
Notwithstanding the G tariff, the move toward deregulation gave Panhandle's customers some muscle. Beginning in 1979, FERC enacted a series of regulations under Sec. 311 of the NGPA authorizing interstate pipelines to transport natural gas purchased from sources other than the pipeline itself. In 1982 FERC instituted the "Blanket Certificate Program," under which interstate pipelines were authorized to transport nonsystem gas (gas to which they did not have title) directly to high-priority end-users (hospitals, schools, and essential agricultural users), so long as the pipeline first received a certificate of public convenience and necessity.
Despite these regulatory initiatives, Panhandle declined to transport nonsystem gas. When CILCO made its first formal request that Panhandle transport gas it had purchased directly from producers in March 1983, Panhandle refused on the ground that enabling its customers to obtain gas from other sources would dramatically reduce demand for the expensive gas it was contractually obligated to purchase, exposing it to enormous take-or-pay liability. CILCO had filed a complaint with FERC in 1982, seeking authorization to interconnect with a natural gas pipeline other than Panhandle; after Panhandle refused to transport nonsystem gas, CILCO incorporated an attack on the G tariff into its case. FERC prospectively invalidated the sole supplier provision of the tariff in 1987 (Opinion No. 265, 38 FERC p 61,164), but that opinion was vacated and the case remanded for a determination of the reasonableness of the sole supplier restriction. Panhandle Eastern Pipeline Co. v. FERC,
In 1983, the FERC issued orders 234-B and 319. 48 Fed.Reg. 34872 (1983); 48 Fed.Reg. 34875 (1983). These orders greatly expanded the class of end-users for which interstate pipelines could obtain approval to transport gas the consumers purchased directly from producers (as opposed to gas thе pipeline had itself purchased for resale). Distributors remained ineligible. Application under these programs, as under the blanket certificate program, was voluntary; pipelines were not required to transport gas purchased from other sources. After FERC adopted Orders 234-B and 319, it approved "Special Marketing Programs" ("SMPs") that permitted certain pipelines, including Panhandle, to obtain credits against their take-or-pay contractual obligations by selling gas to "noncaptive" customers (those price-sensitive industrial end-users able to switch to different fuel sources) at the lower spot market prices rather than at the contract prices. Panhandle's version of the SMP was its "PanMark" program. In September 1984, FERC renewed approval for SMPs such as PanMark for another year, but added a requirement that participating pipelines allow LDCs to purchase up to ten percent of their monthly contract demand directly from gas producers. The FERC order specifically provided for a temporary limited waiver of the sole supplier provision of the G tariff to allow LDCs to participate in the SMPs without jeopardizing their G tariff status. Panhandle objected to the extension of the SMPs to captive LDCs, but continued to participate in order to retard the defection of noncaptive industrial customers.
Those customers of Panhandle ineligible for full participation in the PanMark program, including LDCs like CILCO, continued tо press Panhandle to transport nonsystem gas under authority of its blanket certificate. In late 1983, Panhandle developed the Market Area Transport ("MAT") program, which expanded the class of industrial customers eligible to obtain transportation of gas purchased directly from producers. Panhandle conditioned its agreement to transport for these customers, however, on its right to meet the price of the producer first; if it did, then the customer was obligated to buy the Panhandle gas. The MAT program was not available to LDCs; it too was intended only as a measure to discourage noncaptive industrial consumers from defecting. Panhandle did extend the MAT program to LDCs who did not purchase under the G tariff (those that purchased gas from other pipelines as well, under a nonexclusive tariff), but continued to refuse to include G tariff LDCs in the program.
In 1985, the D.C. Circuit vacated the FERC orders that authorized the SMP and MAT programs. Maryland People's Counsel v. FERC (MPC I),
In response to this series of decisions, FERC issued Order 436. 50 Fed.Reg. 42408 (1985). This order reauthorized pipelines to transport gas purchased from other sources, but on a nondiscriminatory basis. The Order also permitted pipelines to begin transporting on a provisional basis without committing themselves to continue doing so in perpetuity. Having reversed Orders 234-B and 319 in MPC II for failing to address the concerns of captive natural gas consumers, the D.C. Circuit vacated Order 436 because it failed to consider the "take or pay" problem faced by the pipelines. Associated Gas Distribs. v. FERC,
Panhandle initially shut down its MAT program rather than participate in the Order 436 program. During 1986, however, Panhandle began an interim program that continued to deny transportation services for nonsystem gas to captive G tariff LDCs. It did so on the condition that the captive LDCs would not request that Panhandle transport direct-purchase gas for them. If any G tariff LDC made such a request, Panhandle informed them, it would terminate its interim 436 program for all. The LDCs protested, but ultimately capitulated, reasoning that even if they couldn't make use of the program themselves, they also had a stake in preventing fuel-switchable industrial consumers receiving gas directly from Panhandle from defecting to other fuels and thereby increasing the percentage of the Panhandle's fixed costs each would be required to pay.
The state filed suit in February 1984 in its capacity as a natural gas consumer and as parens patriae for a class of plaintiffs consisting of all of Panhandle's indirect purchasers residing in the central Illinois counties served exclusively by Panhandle. The state's complaint alleged that Panhandle monopolized the sale of natural gas within central Illinois by refusing to transport nonsystem gas purchased by LDCs directly from independent producers, thereby forcing them to purchase gas from Panhandle. The complaint comprises ten counts, five under federal law, and five parallel counts under Illinois law, alleging unlawful monopolization (counts 1 and 2), attempted monopolization (counts 3 and 4), monopoly leveraging (counts 5 and 6), an unlawful denial of access to an essential facility (counts 7 and 8), and an unlawful tie of gas transportation to gas purchases (counts 9 and 10).6
The district court denied the state's motion for a preliminary injunction in December 1984. Panhandle then filed a motion to dismiss, predicated on the doctrine of Illinois Brick v. Illinois,
II. Utilicorp 's Impact
Our first order of business, then, is to determine whether Utilicorp controls the outcome of this case. The Utilicorp case addressed the issue of whether the customers of a public utility had standing to sue when the utility's suppliers had allegedly violated the antitrust laws by overcharging the utility for natural gas. In Illinois Brick v. Illinois, the Court held that only direct purchasers may sue sellers who violate the antitrust laws; the purchaser's customers (the "indirect" purchasers) may not.
The Court declined, however, "to create an exception [to the Illinois Brick doctrine] for regulated public utilities."
Illinois maintains that its case is factually distinguishable from Utilicorp. We note initially that the state took a different view of the significance of the factual distinctions between the cases as an amicus curiae in the Utilicorp case. In its brief in that case, the state observed:
The natural gas system in Illinois operates in essentially the same manner as the systems in place in Kansas and Missouri. It is likely that the outcome of this case will be dispositive of the identical issue in Panhandle notwithstanding that the facts in Panhandle are somewhat stronger than the facts in the instant case.
We agree with this assessment. The cases are factually distinguishable, see
In Utilicorp, it was not clear what portion of the monopoly overcharge was in fact passed on to the consumers; in our case, we know that prices paid by consumers reflect 100% of the overcharge. The Court rejected our view that apportionment of the overcharge between the utility and its customers therefore presents no difficulties, for two reasons. "First, an overcharge may injure a utility, apart from the question of lost business, even if the utility raises its rates to offset its increased costs.... 'if a cost rise is merely the occasion for a price increase a businessman could have imposed absent the rise in his costs, the fact that he was earlier not enjoying the benefits of the higher price should not permit the supplier who charges an unlawful price to take those benefits from him without being liable for damages.' " Id. at 2813 (quoting Hanover Shoe,
Both of these rationales, of course, apply with equal force whether or not there is in force an explicit cost-plus contract between purchaser and indirect purchaser. That fact makes the state's reliance on that distinction futile, and indeed, raises questions about the viability of the cost-plus exception in any context. See Calkins, supra, at 363 n. 135. The "broader point" made by the Court that, "even assuming that any economic assumptions underlying the Illinois Brick rule might be disproved in a specific case, we think it an unwarranted and counterproductive exercise to litigate a series of exceptions," id. at 2817, underscores the scope of its ruling in Utilicorp. The Court's interpretation of the cost-plus exception appears so narrow (setting up as it does a demand for rigorous proof of a 100% pass through and then suggesting an unwillingness to consider such detailed evidence) as to preclude its application in any case; it seems particularly unlikely, then, that the Court intended to permit application of the exception by the indirect purchasers of a natural gas supplier to turn on subtle factual distinctions among the supplier's indirect customers.
The state's assertion that Utilicorp should not be applied retroactively to bar the indirect purchaser claims in this case has more plausibility than does its claim that Utilicorp would not control the disposition of those claims if applied. The "threshold test," United States v. Johnson,
To adopt the state's reasoning, however, we would have to ignore the Court's position that Utilicorp faithfully interprets Hanover Shoe and Illinois Brick.
All of which is not to say that Utilicorp mandates the dismissal of the state's entire case. The state's complaint contains pendent state law counts paralleling each federal antitrust violation alleged, and Illinois law explicitly permits indirect purchasers to sue under the state's antitrust laws to recover monopolistic overcharges passed on to them. See ILL.REV.STAT. ch. 38, Sec. 60-7(2). In California v. ARC America,
The state maintains that Panhandle waived its preemption claim by failing to raise it in its original brief. Preemption, the state maintains, has nothing to do with the applicability of Utilicorp, the issue on which this Court orderеd supplementary briefing. We disagree. Prior to Utilicorp, the independent viability of the Illinois Antitrust Act claims was not at issue in this appeal, and Panhandle cannot be faulted for not addressing an irrelevant issue in its original brief. After the Court decided Utilicorp, however, those claims became critical, a fact the state's initial supplementary brief made plain. Panhandle's preemption theory was a direct response to the state's claim that notwithstanding Utilicorp 's affect on the federal claims, the state law claims survived, and was both timely and relevant.
That being said, we do not agree with Panhandle's view that the state law claims are preempted by federal regulation of the natural gas industry. The arguments Panhandle puts forth for preemption would apply with equal force to federal antitrust law, but federal gas regulation does not immunize natural gas companies from application of the federal antitrust laws. California v. Federal Power Comm'n,
III. Panhandle's Conduct
Despite its complex regulatory backdrop, this is a straightforward case. In force between Panhandle and its G tariff customers, like CILCO, was an exclusive dealing contract, approved originally by the Federal Power Commission (FERC's predecessor) in 1951, that required those customers to purchase all of their natural gas requirements from Panhandle. In exchange for this sole supplier provision, Panhandle incurred an obligatiоn to use its best efforts to meet its customers' supply requirements. To satisfy that obligation, Panhandle entered into a number of long-term contracts to secure gas for the future. When Congress deregulated wellhead prices, however, a market that historically had been characterized by chronic shortages quickly found itself awash in natural gas; spot market prices soon fell well below the level at which many pipelines, including Panhandle, had contracted to purchase gas. At that point many LDCs, like CILCO, balked at paying above market rates for their gas and sought to escape their contractual obligations under the G tariff by demanding that Panhandle transport gas they wanted to purchase from other sources. At the same time, these customers wanted to hold Panhandle to its obligation to supply their contract demand quantities, should they desire to purchase them. In the words of the district court, "CILCO wanted to have its cake and eat it too."8
The district court said no. It found that Panhandle did possess monopoly power in the relevant market, power that was not effectively constrained by regulation.10 Nevertheless, the district court concluded that Panhandle's efforts to maintain its G tariff did not violate the antitrust laws because it found that Panhandle's refusal to transport gas for G tariff customers was not an effort to maintain a monopoly in sales of natural gas. It was, the district court found, merely a "lawful refusal to cut its own throat."11
The district court, like many courts addressing monopolization claims, spoke in terms of Panhandle's "intent" to monopolize, leading the parties to debate whether "intent" is an element of the offense of monopolization. "Intent" is relevant to the offense of monopolization. Aspen Skiing Co. v. Aspen Highlands Skiing Corp.,
When courts consider the "intent" of a firm charged with monopolization, they look not to whether the firm intended to achieve or maintain a monopoly, but to whether the underlying purpose of the firm's conduct was to enable the firm to compete more effectively. Did the firm engage in the challenged conduct for a legitimate business reason? Or was the firm's conduct designed solely to insulate the firm from competitive pressure? Intent is relevant, then, because intent determines "whether the challenged conduct is fairly characterized as 'exclusionary' or 'anticompetitive.' " Aspen Skiing,
The state attempts to read "intent" out of the monopolization equation by resurrecting a notion long discarded in antitrust law, namely, that antitrust laws exist to protect competitors. In the state's view, "[m]aintenance of monopoly power ... is 'wilful' ... whenever the conduct of the defendant has caused anticompetitive or injurious effects to the defendant's competitors and ultimately to consumers...." Appellants' Reply Brief at 7. The standard aphorism is that antitrust law protects competition and not competitors, Copperweld Corp. v. Independence Tube Corp.,
The state claims, however, that Panhandle's reasons for refusing to transport nonsystem gas are irrelevant because Panhandle's pipelines are "essential facilities." And indeed, "[s]ome cases hold ... that a firm which controls a facility essential to its competitors may be guilty of monopolization if it refuses to allow them access to the facility." Olympia Equipment,
The state's essential facility claim also fails because to be liable for monopolizing an essential facility, providing access to the facility must have been feasible for the owner. This second prerequisite to essential facility liability suggests that essential facilities cases are no different conceptually than cases involving other monopolization theories, because it reintroduces "intent" (a.k.a. "business justification") back into the monopolization equation and excuses refusals to provide access justified by the owner's legitimate business concerns. See MCI,
The district court found that Panhandle's intransigence regarding the G tariff was genuinely and reasonably motivated by the need to limit its potential take-or-pay liability, not by a desire to maintain its monopoly position by excluding competition in the sale of natural gas. In the district court's view that concern, when coupled with the regulatory flux the natural gas industry was undergoing at the time, was sufficient to negate the possibility that Panhandle was motivated by anticompetitive intent.13 That finding is one of fact to which we must defer since there was ample evidence to support it. Aspen Skiing,
In any event, it is one with which we agree. "A plausible response to the gas shortages of the 1970s, [take-or-pay clauses have] created significant dislocations in light of the oversupply of gas that has occurred since. Today many purchasers face disastrous take-or-pay liability without sufficient outlets to recoup their losses." Mobile Oil Exploration,
Monopolists needn't acquiesce to every demand placed upon them by competitors or customers; a monopolist's duties are negative--to refrain from anticompetitive conduct--rather than affirmative--to promote competition. Olympia Equipment,
To cite just one example, we addressed quite similar claims in MCI, when MCI claimed that AT & T violated the antitrust laws by refusing to grant it access to interconnections that would have given it access to AT & T's entire nationwide long-distance network. In MCI the FCC, like the FERC in this case, appeared to be opening the telecommunications industry to comрetition, but had not directed AT & T to provide access to its long-distance network to competitors. We concluded that AT & T's refusal to voluntarily assume "the extraordinary obligation to fill in the gaps in its competitor's network," id. at 1149, did not suffice to support a finding that it was trying to maintain its monopoly of long-distance telephone service by anticompetitive means. "[G]iven the unsettled regulatory status of the telecommunications industry at the time of these events," we held that MCI had failed to present sufficient evidence "to permit a finding that AT & T's denial of interconnection for multipoint service was primarily motivated by an illegal intent to monopolize." Id.
To support its position the state, not surprisingly, points to cases in which courts have held that a monopolist's actions evinced an attempt to exclude competition from the market rather than an attempt to minimize costs. The cases it cites are factually distinguishable, however, and do nothing to undermine the validity of the district court's factual finding in this case. We need not address every case in which courts have found a monopolist's actions were animated by anticompetitive intent to make the point; the state relies most heavily on Otter Tail Power Co. v. United States,
These distinctions make all the difference. Otter Tail's business justification was simply that it could not compete if forced to abandon practices designed to eliminate competition in the market for retail electrical transmission; the district court therefore found, and the Supreme Court agreed, that "Otter Tail's refusals to sell at wholesale or to wheel were solely to prevent municipal power systems from eroding its monopolistic position."
Despite the dire predictions of the state, this does not mean that there now exists a "contract immunity" defense to antitrust liability. The existence of a contract in this case does not immunize Panhandle from antitrust liability; it is merely a factor that is relevant to the question of Panhandle's intent to monopolize. The existence of a contract that was itself an unreasonable restraint of trade, violating Sec. 1 of the Sherman Act, would do little to dispel an inference of anticompetitive intent. In Otter Tail, for example, the utility attempted to invoke contractual provisions in its contracts with other suppliers that forbade the suppliers from providing electricity to any of the utility's retail customers, past or present. That provision, as the Supreme Court observed, was simply a territorial allocation scheme designed to insulate the utility from competition in the sale of electricity and had no legitimate justification.
The state has its own theory about Panhandle's motives, but its conjecture does little to make us question the soundness of the district court's findings. According to the state, Panhandle refused to adopt an open access transportation policy because it wanted to exact monopoly profits from the gas it sold to its G tariff customers. It did so, according to the state, by tying the purchase of its monopolistically priced gas to the purchase of its regulated pipeline capacity and by unlawfully segmenting the central Illinois natural gas market and price discriminating between gas consumers who were able to switch to an alternate fuel and those who did not.
Panhandle, however, didn't profit on its sales of gas to the LDCs. Panhandle's gas was priced above the spot market, but that price merely reflected the price it was paying for gas as the result of the long-term contracts it agreed to in order to secure gas that was both high-priced and scarce during the early days of deregulation. Panhandle's rate of return was based on its transportation service, not its gas prices, a fact that suggests thаt absent a fear of take-or-pay liability it would have had little reason to object to transporting gas purchased from other sources. The state's brief acknowledges this point but, inexplicably, goes on to rail against "the profits of Panhandle and its subsidiaries on gas sales." Brief of Appellant at 35. The inconsistency is explained later, when the state reveals that what it calls "profits" on the sale of gas are "more accurately" characterized not as profits but as losses avoided. Brief of Appellant at 39. Translated, the state's theory is simply that Panhandle's desire to avoid take-or-pay liability constituted an antitrust violation because Panhandle enforced the G tariff rather than reducing its rate of return by recouping less than 100% of its gas prices. Panhandle was entitled to pass through 100% of the cost of its gas to its customers, however; it had no duty to voluntarily reduce its rate of return below the "just and reasonable" level authorized by regulators. Cf. Town of Concord v. Boston Edison Co.,
The state points out that Panhandle was vеrtically integrated, which meant that it might have been able to force consumers to pay a supracompetitive price for gas by purchasing gas at above market rates from affiliated producers, but there is no evidence that this was the reason that its costs were high. The evidence suggested that its high costs were due principally to its Algerian and Canadian ventures, neither of which were with affiliated producers. True, Panhandle bought the liquified Algerian gas from an affiliated pipeline, Trunkline, but self-dealing is a danger when a regulated company and an unregulated company are vertically integrated, see Jefferson Parish Hosp. Dist. No. 2 v. Hyde,
But what of Panhandle's willingness to transport for its noncaptive customers? By mollifying them, the state maintains, Panhandle engaged in "price discrimination" and "market segmentation," facilitating its ability to charge supracompetitive prices for the gas it sold to captive customers and thereby perfecting its monopoly over those customers. This is exactly the argument raised by petitioners when they challenged FERC Orders 234 and 319 in MPC II, see
First, we should be clear about the state's complaint. The discrimination it objects to related not to thе price of gas Panhandle sold to consumers who could switch between gas and other fuels (producers, not Panhandle, sold gas at the lower spot market rate), but to the discriminatory access Panhandle gave those consumers to cheaper sources of gas by agreeing to transport it. In this respect, the state's theory merely restates its claim, discussed above, that the G tariff did not preclude LDCs from purchasing gas directly from producers. See supra note 2. The state maintains that Panhandle selectively applied its interpretation of the G tariff--that the tariff applied to direct sales from producers to consumers--to captive customers, but fails to explain that the end-users who obtained transportation for nonsystem gas were not themselves G tariff customers, and were under no contractual obligation to Panhandle. Of course, neither were the captive residential and industrial consumers to whom the LDCs distributed gas, but those consumers didn't purchase gas directly from the wellhead. The district court found that the fuel-switchable end-users eligible for the MAT program did, and the state points to no contrary evidence. The captive residential and commercial LDC customers could, in theory, have purchased gas from producers directly, but most LDCs, including CILCO, "had transportation tariffs which either expressly precluded transportation services for residential end-users or effectively precluded transportation for residential end-users by imposing a volumetric limitation.... In addition ... most producers and brokers were unwilling to enter into contracts for small volumes of gas."
After FERC issued Order 436, discrimination on the basis of sole supplier clauses was no longer legitimate; the FERC order required pipelines offering transportation to make the option available to all customers, regardless of the existence of full requirements or sole supplier clauses in their gas purchase contracts. See 50 Fed.Reg. 42445. Rather than comply, Panhandle initially shut down its MAT program, and only resumed it after its G tariff customers agreed not to request unbundled transportation services. The G tariff customers agreed to this condition because they, too, had a stake in keeping fuel-switchable industrial consumers on line; keeping the industrials on line helped spread the fixed cost component of Panhandle's rates among a wider customer base, and helped support their own revenues by maintaining high through-put volumes to these end-users (the LDCs, like Panhandle, were effectively selling transporting services to these customers). This agreement did not, as the state suggests, violate the terms of Order 436, for the Order also required "full requirements" customers to switch to a partial requirements tariff to obtain transportation, recognizing that "[t]here can be differences in the costs of providing full and partial requirements service." 50 Fed.Reg. at 42445; see also FERC Order 436-A, 50 Fed.Reg. 52217 (1985) (reiterating requirement that full requirements customers switch to partial requirements tariff to receive pipeline transportation services). Panhandle's G tariff customers thus had the option to obtain transportation by switching to a partial requirements tariff, but were unwilling to give up the security of the G tariff to do so; Panhandle therefore had no obligation to transport for them. These events effectively demonstrate that if the state (and the residential consumers it represents) have a quarrel with a utility, it should be with CILCO and other LDCs rather than with Panhandle. Faced with a choice of obtaining access to low-priced gas supplies or giving up stable gas supplies, CILCO and other LDCs opted for the latter.
The second reason the state's price discrimination theory fails is that, as noted above, there is no evidence suggesting that self-dealing was the cause of Panhandle's high gas prices. The real culprits were long-term supply contracts. When the self-dealing charge is deflated, the state's price discrimination theory collapses as well because Panhandle had no monopoly profits to hide. Panhandle undoubtedly wanted to pass on the full amount of its gas costs, but that is a far cry from extracting monopoly profits. The state's theory ignores the fact that, undеr its PanMark program, Panhandle received take-or-pay credit from producers for volumes its fuel-switchable customers purchased from them directly. Panhandle did not always receive take-or-pay credit for the gas transported under the MAT program (although the MAT program did yield over $50 million in take-or-pay credits), but that program too was designed to help mitigate the problems created by the discrepancy between the spot market price of natural gas and the price Panhandle was contractually obligated to pay. PanMark enabled Panhandle to recover its gas costs by giving it take-or-pay credits for gas sold at low spot market prices, and MAT enabled Panhandle to obtain some take-or-pay relief by keeping large industrial end-users from switching, or converting, to other fuels. FERC may or may not have adequately justified its reasons for approving such programs, see MPC I,
IV. Conclusion
This case is essentially a dispute about who should bear the cost of the transformation of the natural gas industry from a regulatory to a competitive regime. Panhandle refused to transport natural gas for its G tariff customers out of concern for its take-or-pay exposure. The state maintains that enforcing the G tariff was anticompetitive because it was at odds with the changes wrought by enactment of the NGPA and FERC's moves to give consumers access to a competitive gas market. FERC's reluctance to jump with both feet into an open access transportation policy, however, rebuts the state's claim that the FERC's initial sallies in that direction stripped the G tariff of its mantle of regulatory sanction. Panhandle had to respond to those changes mandated by law and by regulation, but was unwilling to go further than required because to do so would have been to expose itself to huge losses. Panhandle abided by the terms of FERC's transportation initiatives, and relied on them in good faith, a fact that, while not rising to the level of a regulatory justification defense (the FERC did not require pipelines to participate in the programs), leads us to agree with the district court that Panhandle's programs were the product of legitimate business concerns and not a naked desire to deny natural gas producers access to the central Illinois market. FERC itself was reluctant to move ahead too quickly; it didn't require pipelines offering unbundled transportation to do so on a nondiscriminatory basis until it adopted Order 436 in late 1985, and that Order was later vacated because it did not adequately address the dilemmas faced by pipelines like Panhandle. None of FERC's attempts to manage the deregulatory transition have completely satisfied the courts; it is hardly reasonable to expect that Panhandle should have jumped on the open access bandwagon after FERC's initial, tentative, moves to get that wagon rolling. The district court attributed Panhandle's reserve in the face of regulatory flux to caution and self-preservation rather than to monopolistic excess, a determination we find eminently reasonable. The decision of the district court is therefore
AFFIRMED.
Notes
Since this appeal was filed, Roland W. Burris has succeeded Neil F. Hartigan as Illinois Attorney General. We have substituted Mr. Burris's name for Mr. Hartigan's. See Fed.R.App.Pro. 43(c)(1)
We have limited our exposition of the facts to those that are essential to an understanding of the issues raised on appeal. For the complete story, the reader is referred to the district court's comprehensive opinion at
"A take-or-pay clause allocates part of the volume risk to the purchaser--the pipeline company--by obligating the purchaser to pay for a specified quantity of gas whether or not the purchaser actually takes delivery of that gas." Pierce, supra, at 355
Panhandle's gas purchases during this period have thus far survived regulatory and judicial review. See Office of Consumer's Counsel v. FERC,
Section 1.9 of the General Terms and Conditions applicable to Panhandle's G-2 tariff reads:
9 General Service Buyer. General Service Buyer is any buyer which does not purchase gas from any other natural-gas company, as defined in the Natural Gas Act [NGA], for distribution in areas served with Seller's gas; provided, however, a Buyer under the General Service Rate Schedule which seeks from Seller an increase in contract demand and Seller is unable to supply the increase in contract demand, then such Buyer may purchase natural gas from other natural-gas companies but shall remain a General Service Buyer under this Tariff
See Appellant's Supplemental Appendix at 347 (emphasis added).
The meaning of the phrase "as defined in the Natural Gas Act" is a bone of contention between the parties, one that could affect the outcome of the case. The state maintains that Panhandle's characterization of the G tariff as a "sole supplier" contract is erroneous, and asserts therefore that the existence of the G tariff was no justification for Panhandle's refusal to transport gas during the early 1980s. The state maintains that the G tariff did not restrict G tariff customers from purchasing "new gas," that is, gas not committed or dedicated to interstate commerce as of November 8, 1978, see 15 U.S.C. Sec. 3431(a)(1)(A) and (B), directly from producers because producers are not "natural gas companies" under the NGPA.
The NGPA didn't change the definition of "natural-gas company" under the NGA, however; it merely rendered the sale of "new gas" an event over which the FERC is not entitled to exercise jurisdiction. Panhandle Eastern Pipeline Co., 38 FERC p 63,009 at 65,052-53 (1987). Moreover, the state concedes that producers who sell natural gas for resale in interstate commerce were, before enactment of the NGPA in 1978, natural gas companies under the NGA (15 U.S.C. Sec. 717a). Appellant's Brief at 34. That is the only definition relevant to the interpretation of the G tariff as that is the definition incorporated by the tariff. It is true that in 1951, when the G tariff was first approved, gas producers were not considered to be "natural-gas companies." But producers sold almost exclusively to pipelines, so the omission of producers in the 1951 tariff was hardly significant.
Moreover, the industry understanding changed with the Supreme Court's decision in Phillips Petroleum v. State of Wisconsin,
It is possible, we suppose, to read the reference to the NGA definition in the G tariff as an attempt to incorporate all future manifestations of the definition, but that is not the interpretation adopted by the parties to the contract. Panhandle's customers also read the G tariff to require them to buy all their gas from Panhandle; CILCO took that position when it challenged the provision in its FERC complaint, after the NGPA modified the NGA definition of "natural-gas company." See Panhandle Eastern Pipe Line Co. v. FERC (Panhandle I),
The state cites evidence suggesting that Panhandle did not really interpret Sec. 1.9 to bar its customers from purchasing gas directly from producers, but the district court found that Panhandle maintainеd the position that the G tariff was a sole supplier tariff and that finding is not clearly erroneous. At any rate, whether Panhandle subjectively believed that the tariff was a sole supplier provision is largely irrelevant because the state concedes that concern about take-or-pay liability animated Panhandle's refusal to transport "new gas" for its customers. The question in this case is simply whether that motivation was anticompetitive within the meaning of the antitrust laws.
The subsequent history of FERC's efforts to resolve the take-or-pay problem are not directly relevant to our case because all of Panhandle's challenged conduct took place before Order 436 was vacated. Nevertheless, the years spent by FERC and the courts grappling with the issue are instructive, for they provide compelling evidence of the intractable nature of the problem. After Order 436 was vacated, FERC next issued Order 500, an interim rule, to temporarily address the take-or-pay problem while FERC conducted rulemaking proceedings to comply with the concerns raised in AGD. That order, too, was remanded. American Gas Ass'n v. FERC,
The state's complaint alleges that the tie was an unlawful restraint of trade violating of Sec. 1 of the Shermаn Act, rather than an exclusionary practice violating Sec. 2. In its brief on appeal, however, the state describes the tie as an exclusionary practice relevant to its Sec. 2 monopolization claim, and, accordingly, that is how we treat it
We do not address the issue of whether Utilicorp bars the state's claims for injunctive relief, as we agree with Panhandle that such relief is unavailable because Panhandle now makes its transportation services available to its LDC customers
Alternatively, in the words of FERC:
Purchasers of natural gas, seeing the availability of supplies in the field at prices below the rolled-in average cost of all gas, are seeking to purchase gas directly in the field and have it transported to the city-gate or burner-tip in competition with the system supplies which the pipeline retains under certain uneconomic long-term contracts.
FERC Order 436, 48 Fed.Reg. at 42421.
The state does not claim that the G tariff was originally violative of the antitrust laws
Panhandle disputes these findings, but our agreement with the district court's finding that Panhandle lacked anticompetitive intent makes it unnecessary to address them
By contrast, the district court did find that Panhandle's adoption of its "Transportation Guidelines" for industrial end-users was anticompetitive. Id. at 891-94, 921. The district court concluded, however, that Panhandle did not have monopoly power over those users, saving it from antitrust liability on that score as well. Id. at 888, 922
United States v. Aluminum Co. of America ("Alcoa"),
The district court rejected, however, Panhandle's view that its concern abоut take-or-pay liability was sufficient to constitute a defense, adopting a more narrow view of the type of business justification that constitutes a defense. In the district court's view, "[i]t is not a legitimate business justification for antitrust purposes that the defendant sought to protect itself from added costs or lost profits."
We do not believe that the distinction among types of business justifications drawn by the district court is a viable one. The district court cited Otter Tail Power Co. v. United States,
The state's claim that Panhandle's status as a utility is irrelevant since it was not required by regulation to enforce its G tariff is misleading. Panhandle was required by the FERC, pursuant to the FERC's authority under Sec. 7(a) of the NGA, to extend service to many of its customers. Order 436, 50 Fed.Reg. at 42440. To serve all of its customers, Panhandle was required by regulation to anticipate their future requirements for natural gas. See, e.g., 18 C.F.R. Sec. 2.61 (generally requiring pipelines to demonstrate ability to meet projected demand for next twelve years). Moreover, as the district court observed, "[o]nce a pipeline has commenced service ... it may not abandon or terminate that service unless it first obtains a certificate of abandonment from the FERC. A pipeline is required by FERC to continue providing service to an LDC customer even after the expiration of the service agreement with the customer."
Litton Systems, Inc. v. American Tel. & Tel.,