City of Chanute, Kan. v. Williams Natural Gas Co.

Decision Date09 February 1988
Docket NumberNo. 87-1463-K.,87-1463-K.
Citation678 F. Supp. 1517
PartiesCITY OF CHANUTE, KANSAS; City of Auburn, Kansas; City of Cleveland, Oklahoma; City of Garnett, Kansas; City of Humboldt, Kansas; City of Iola, Kansas; City of Neodesha, Kansas; and City of Osage, Kansas, Plaintiffs, v. WILLIAMS NATURAL GAS COMPANY, Defendant.
CourtU.S. District Court — District of Kansas

COPYRIGHT MATERIAL OMITTED

Wheatley & Wollesen, Annapolis, Md., Stumbo, Stumbo, Hanson & Hendricks, Topeka, Kan., for plaintiffs.

Hall, Estill, Hardwick, Gable, Golden & Nelson, Tulsa, Okl., Adams, Jones, Robinson and Malone, Wichita, Kan., B.E. Potts, Gen. Counsel, Williams Natural Gas Co., Tulsa, Okl., for defendant.

MEMORANDUM AND ORDER

PATRICK F. KELLY, District Judge.

Plaintiffs, Cities of Chanute, Auburn, Garnett, Humboldt, Iola, Neodesha, and Osage City, Kansas, and Cleveland, Oklahoma ("Cities"), seek an injunction compelling defendant Williams Natural Gas Company ("Williams" or "WNG") to permanently open access to its interstate natural gas pipeline which is connected to each of the plaintiff Cities. The Cities allege Williams' failure to open access to its pipeline to alternate suppliers of natural gas constitutes an intentional monopoly in violation of § 2 of the Sherman Act, 15 U.S.C. § 2.

This action was filed on August 3, 1987, and on August 7, 1987 a hearing was held before the Honorable Frank G. Theis on plaintiffs' motion for a temporary restraining order. In a ruling from the bench, Judge Theis denied the plaintiffs' motion. The Cities subsequently filed the motion for preliminary injunction now pending before this court.

A hearing on the preliminary injunction motion was held on October 20-23, 27-28 and November 16-19, 1987 (hereafter referred to as "hearing"). After the hearing, the parties submitted extensive briefs detailing their proposed findings of fact and conclusions of law. Final oral argument on the motion was held January 25, 1988, at which time the court announced that it would grant the requested injunction. However, the court stated the injunction would not take effect until it issued a full written memorandum and order. Accordingly, the court is now prepared to make written findings and conclusions on the plaintiffs' motion for a preliminary injunction.

Factual Background

Plaintiff Cities are each municipalities with their own natural gas distribution systems. The Cities purchase natural gas at wholesale and then resell it to residential, commercial and industrial customers within the Cities and surrounding areas.

Defendant Williams Natural Gas is a Delaware corporation with its principal place of business in Tulsa, Oklahoma. Williams is engaged in the business of interstate sale and transportation of natural gas, and as such is regulated by the Federal Energy Regulatory Commission ("FERC" or "the Commission"). Williams obtains gas from producing fields in various states, transmits the gas to its service areas, and delivers it to customers in Kansas, Oklahoma, Missouri and Nebraska. Williams' customers are primarily of two types: (1) local distribution companies ("LDCs"), such as the plaintiff Cities, which purchase gas from WNG at a "margin" or "markup", and resell the gas to the ultimate consumers; and (2) industrial gas users which purchase gas directly from WNG.

Each of the plaintiff Cities in this action can be characterized as an "LDC" and has or has had a "full requirements" contract with WNG. Under such contracts, the Cities must purchase all of their gas requirements from WNG, and WNG must maintain sufficient gas reserves to meet those requirements. For purposes of this case, there are essentially two types of rates and services available to the Cities under "full requirements" contracts: firm service (F-2 rates — $3.16 and $3.26/mcf), which is primarily for residential customers; and large industrial service (I-2 rates — $2.75/mcf). Under either service, the gas is purchased by the Cities for resale to residential and industrial users.

In addition to these full requirements contracts, all of the Cities, except Auburn and Cleveland, have direct sale contracts with WNG to purchase gas for delivery to and use by the Cities in their municipal electric power plants. These contracts are known as "interruptible service" contracts and differ substantially from "full requirements" contracts. Interruptible service is provided on a "when available" basis, and accordingly, may be interrupted during periods when demand for gas is greatest. Further, either party can terminate such contracts upon 30 days' notice.

With the exception of the cities of Cleveland and Garnett, all of the plaintiff Cities currently have "full requirements" contracts in place with WNG, and the parties continue to operate under those contracts. Cleveland and Garnett's contracts with WNG expired by their own terms in May of 1987.1 However, those two cities continue to purchase natural gas from WNG under the full requirements resale service provided under WNG's FERC certificate and tariff.

WNG's pipeline is the only major interstate pipeline serving plaintiff Cities, and prior to December, 1986, other natural gas suppliers did not have access to Williams' pipeline. However, prompted by the FERC's issuance of Order No. 436 (see discussion at pp. 12-14), WNG opened its pipeline to transportation gas on an interim basis on December 22, 1986. Under this "open-access" system, the Cities had an opportunity to purchase natural gas from third parties (e.g., other producers and marketing companies) and have that gas transported over WNG's pipeline. In return for transporting the gas, Williams received a fee called a "transportation rate". In order that the Cities could purchase gas from other sources, FERC temporarily waived its certificate and tariff provisions and Williams temporarily waived its "full requirements" contract provisions with the Cities.

Thus, while the "full requirements" provisions were waived, WNG's customers (including the plaintiff Cities) were free to replace all or any part of the gas they normally purchased from WNG with third party gas.

By April of 1987, WNG's customers were purchasing from third parties large volumes of gas previously purchased from WNG. WNG's vice president of marketing and supply, Jack Finch, testified at the hearing that by July of 1987, 80% of WNG's sales of system supply gas had been converted to transportation. Finch further testified that as a result of the reduced sales, WNG's "take-or-pay" exposure increased dramatically during the period of open access. (Note: "take-or-pay" contracts between pipelines and producers commonly require a pipeline to pay for a specified percentage of delivered gas whether or not it is in fact taken).

Despite increasing take-or-pay exposure, WNG was able to keep the pipeline open until August 1, 1987, by negotiating with its producers (primarily Amoco Oil Company) for take-or-pay relief.

During the period of interim open access, each of the plaintiff Cities obtained gas from Vesta Energy Company ("Vesta"), a marketing company engaged in the sale at the wellhead of natural gas supplies. Some of the Cities contracted directly with Vesta while others contracted with a consultant, Leo Edison, who, in turn, contracted with Vesta. The contracts were of varying terms and duration but can be generally categorized as follows:

Cleveland

On December 9, 1986, the City of Cleveland, Oklahoma entered into a "natural gas sale agreement" with Leo Edison, whereby the City agreed to purchase gas from Edison for a period of five years at a specified price of $2.17/mcf, and thereafter at $.50/mcf less than the price of WNG's gas. Pursuant to a written transportation agreement, WNG commenced transportation of that third party gas to the City of Cleveland in February, 1987.

Auburn, Humboldt, Iola and Osage City

The Cities of Auburn, Humboldt, Iola and Osage City also commenced the purchase of third party transport gas in June and July of 1987 under gas purchase agreements with Leo Edison. These agreements were of short-term duration ending in September or October of 1987, or were month-to-month arrangements which could be cancelled by either party on 30 days' notice. The gas purchased by these Cities was transported by WNG under written transportation agreements with each City.

The source of supply for Edison's contracts with the City of Cleveland, as well as with the Cities of Auburn, Humboldt, Iola and Osage City, was a five-year contract between Edison and Vesta. The contract provided for a base price of $1.50/mcf at the delivery point, to be adjusted every six months based on 70% of the increase or decrease in WNG's average resale price to its customers.

Neodesha, Garnett and Chanute

The Cities of Neodesha, Garnett and Chanute also commenced transportation under WNG's interim open-access program in June, 1987, pursuant to written transportation agreements with WNG and direct sale agreements with Vesta. The City of Chanute purchased gas from Vesta under a month-to-month arrangement while the City of Neodesha purchased gas from Vesta under an agreement covering the months of June and July, 1987 (Pltfs' Ex. 5). The City of Garnett's agreement with Vesta covered only the month of June, 1987. While none of these three cities actually entered into a long-term contract with Vesta, the evidence at the hearing showed that negotiations for a long-term arrangement had been completed between these cities and Vesta when WNG announced the closing of its pipeline effective August 1, 1987. Vesta's vice president of gas sales, David Tudor, testified that except for the starting price, the terms of the long-term agreement contemplated by these three cities and Vesta were identical to the terms of the Vesta/Edison agreement. Tudor further testified that the contracts were not formalized because of uncertainty as to how long WNG would keep its pipeline open.

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7 cases
  • City of Chanute, Kan. v. Williams Natural Gas Co.
    • United States
    • U.S. Court of Appeals — Tenth Circuit
    • January 30, 1992
    ...gas pipeline in the area of the Cities. Economically, it was not feasible for the Cities to physically duplicate the pipeline. Chanute I, 678 F.Supp. at 1533. Williams temporarily closed its pipeline to the transportation of third party gas even though the Cities either had long term contra......
  • City of Chanute, Kan. v. Williams Natural Gas Co., 87-1463-K.
    • United States
    • U.S. District Court — District of Kansas
    • July 27, 1990
    ...the court on two separate occasions for findings of fact and conclusions of law. City of Chanute, Kan. v. Williams Natural Gas Co., 678 F.Supp. 1517 (D.Kan.1988) (hereinafter, Chanute I); and City of Chanute, et al. v. Williams Natural Gas Co., Case No. 87-1463-K, 1990 WL 20019 (D.Kan. Feb.......
  • Bruce Foods Corp. v. Tex. Gas Serv.
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    • U.S. District Court — Western District of Texas
    • February 19, 2014
    ...to service customers who have noninterruptible, or firm, transportation rights?" (emphasis added)); City of Chanute, Kan. v. Williams Natural Gas Co., 678 F. Supp. 1517, 1520 (D. Kan. 1988); Office of Pub. Counsel v. Mo. Pub. Serv. Comm'n, 409 S.W. 371, 374 (Mo. 2013) ("[T]he timing of supp......
  • City of Chanute, Kansas v. Williams Nat. Gas Co.
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    ...as well as a history of the natural gas industry, is set out in several district court opinions. See City of Chanute v. Williams Natural Gas Co., 678 F.Supp. 1517 (D.Kan.1988) (Chanute I ); City of Chanute v. Williams Natural Gas Co., 1990-1 Trade Cas. p 68,967, 1990 WL 20019 (D.Kan. Feb. 1......
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7 books & journal articles
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    • ABA Antitrust Library Market Power Handbook. Competition Law and Economic Foundations. Second Edition
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    ...(C.D. Cal. 1984), 68, 113 Chicago Bridge & Iron Co. v. FTC , 534 F.3d 410 (5th Cir. 2008), 163 City of Chanute v. Williams Natural Gas, 678 F. Supp. 1517 (D. Kan. 1988), 75 City of New York v. Group Health, No. 06 Civ. 13122, 2010 WL 2132246 (S.D.N.Y. 2010), 1, 61, 92 Cmty. Publishers v. Do......
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    • ABA Antitrust Library Mergers and Acquisitions. Understanding the Antitrust Issues. Fourth Edition
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    ...Citizen Publ’g Co. v. United States, 394 U.S. 131, (1969), 270, 271, 273, 274, 276, 517 City of Chanute v. Williams Natural Gas Co., 678 F. Supp. 1517 (D. Kan. 1988), 114 City of New York v. Grp. Health, 2010 WL 2132246 (S.D.N.Y. 2010), aff’d , 649 F.3d 151 (2d Cir. 2011), 154 Coast Mountai......
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    ...AG, 79 U.S.L.W. 3513 (2011), 328 Citizen Publ’g v. United States, 394 U.S. 131 (1969), 162 City of Chanute v. Williams Natural Gas Co., 678 F. Supp. 1517 (D. Kan. 1988), 153, 154, 271 City of Chanute v. Williams Natural Gas Co., 743 F. Supp. 1437 (D. Kan. 1990), 153, 154, 273 Cmty. Publishe......
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