In 2001, just as the Clinton administration left office, the Federal Trade Commission imposed conditions on El Paso Energy Corporation’s $16 billion acquisition of The Coastal Corporation. Both companies operated natural gas pipelines. The FTC held up the deal for over a year before allowing the merger to close; the conditions included the forced sale of various gas pipeline systems to FTC-selected buyers.
The FTC was especially concerned about the close proximity of El Paso’s TGP and Coastal’s ANR pipelines, which serviced wells in a small part of the Gulf of Mexico. The FTC forced El Paso to further subsidize a potential new competitor, Williams Field Services, one of the Commission-approved buyers of El Paso’s seized pipeline assets. As El Paso’s counsel later explained:
In order to address the concern that ANR and TGP were particularly close competitors, the [FTC] Order created a ”virtual pipeline” that would position the acquirer of the Tarpon and Green Canyon pipelines to be a more effective competitor in the Development Area, so drillers in that area would have another option. The “virtual pipeline” was created by funding a “Development Fund” that, while controlled by the FTC (via an independent monitor), would be available to Williams for the sole purpose of supporting pipeline construction into the “Development Area.”
El Paso deposited $40 million in this so-called development fund with the FTC monitor — an employee of the soon-to-be-defunct Arthur Andersen — for Williams’s use. Today, almost ten years later, the entire $40 million (plus interest) remains with the monitor. Williams never touched a dime of it.
According to El Paso, it turns out the natural gas market changed over the past decade in ways the FTC couldn’t anticipate back in 2000. Notably, several new competitors entered the market — El Paso said there are at least six in or near the “Development Area” in question — and there was an “unanticipated decline in natural gas production in the Gulf [that] has created excess capacity.” Furthermore, natural gas exploration shifted to other parts of the Gulf.
So what about the $40 million? Under the FTC order, it can only be used for Williams’s activities in this one “Development Area,” where there’s no foreseeable demand for additional pipeline capacity. But the order doesn’t expire until March 2021 — 20 years from the date of the original FTC action — at which time El Paso can reclaim any unused funds.
Last week, El Paso asked the FTC to refund the money immediately, 11 years ahead of schedule, because, of course, there’s little chance it will be used by Williams for the FTC’s intended purpose. “Returning the money now will enable El Paso to use the funds productively in its ongoing operations,” El Paso attorney Neil Imus said in his filing with the FTC.
Imus noted this wasn’t the first time that circumstances compelled the FTC to abandon a prior order. It’s not even the first time it’s happened in a case involving natural gas pipelines. In 1995, Imus said, “the FTC concluded an unforeseen increase in entry and pipeline capacity (prompted by new FERC rules*), coupled with flat natural gas production, had led to excess capacity and unexpectedly vigorous competition in the market,” eliminating the justification for a prior FTC order against Arkla, Inc.
El Paso’s petition highlights an important problem with “merger review” and similar forms of backward-looking regulations. Once the FTC conducts its review and imposes conditions, there is no mechanism or incentive for the Commission to follow-up and determine whether its predictions about future marketplace behavior come to pass. The legal burden is on the accused businesses to come forward with any new information. And it goes without saying that the Commission is not liable for any negative effects its order might have on competition (indeed, all the FTC commissioners responsible for the El Paso order have long departed from the government).
*The Federal Energy Regulatory Commission (FERC) controls who may compete in the natural gas pipeline market; the FTC never addresses this barrier to market entry, instead holding the pipeline operators liable for any lack of competition.