U.S. v. Enova Corp.

• Decision Date: 30 June 2000
• Docket Number: No. Civ.A. 98-583.,Civ.A. 98-583.
• Citation: 107 F.Supp.2d 10
• Parties: UNITED STATES of America, Plaintiff, v. ENOVA CORPORATION, Defendant.
• Court: U.S. District Court — District of Columbia

107 F.Supp.2d 10

UNITED STATES of America, Plaintiff, v. ENOVA CORPORATION, Defendant.

No. Civ.A. 98-583.

United States District Court, District of Columbia.

June 30, 2000.

COPYRIGHT MATERIAL OMITTED

Jade Alice Eaton, U.S. Dept. of Justice, Washington, DC, for U.S.

Linda M. McMahon, Steven C. Sunshine, Sherman & Sterling, Washington, DC, for Enova Corp.

James Barr Moorhead, Steptoe & Johnson, L.L.P., Washington, DC, for Southern California Edison Co.

MEMORANDUM OPINION

ROBERTS, District Judge.

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,¹ 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,² 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.)³ 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,⁴ 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,⁵ 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.⁶ 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.⁷

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,⁸ to a purchaser or purchasers acceptable to the United States in its sole discretion. (Proposed Final J. at §§ II(F), IV(A).)⁹ 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,¹⁰ and by monitoring PE/Enova's ability to enter into other power management contracts.¹¹ (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, 14-15.) 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...