State of Ill., ex rel. Burris v. Panhandle Eastern Pipe Line Co.

• Decision Date: 09 September 1991
• Docket Number: No. 90-1231,90-1231
• Citation: 935 F.2d 1469
• Parties: , 1991-1 Trade Cases 69,455 STATE OF ILLINOIS, ex rel. Roland W. BURRIS, * Attorney General of the State of Illinois, in its proprietary capacity, in its parens patriae capacity, and in its representative capacity, Plaintiff-Appellant, v. PANHANDLE EASTERN PIPE LINE COMPANY, a Delaware corporation, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1469

935 F.2d 1469

60 USLW 2014, 1991-1 Trade Cases 69,455

STATE OF ILLINOIS, ex rel. Roland W. BURRIS, ^*

Attorney General of the State of Illinois, in its

proprietary 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., 730 F.Supp. 826 (C.D.Ill.1990). We agree, and affirm the judgment.

I. Background ¹

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 regulation, 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. ----, 111 S.Ct. 615, 620-21, 112 L.Ed.2d 636 (1991). The NGPA also changed the regulations governing the distribution of natural gas, providing an impetus for the Federal Energy Regulatory Commission (FERC) to loosen the grip of pipelines on the territorial monopolies regulation had preserved. Section 311 of the NGPA authorized FERC to permit interstate pipelines to transport gas purchased by local distribution companies (LDCs) and large industrial end-users directly from producers, although it did not authorize FERC to order the pipelines to do so.

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 provisions ² 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, 230 F.2d 810 (D.C.Cir.1955). As long as the price of natural gas was regulated, the sole supplier provision was a small price for the G tariff customers to pay for the security of a stable supply of gas. Under price regulation, they could afford to be indifferent to their source of gas, and were: Panhandle's supply contracts with LDCs were typically long-term affairs (its 1970 contract with CILCO had a term of eighteen years), a fact that also contributed to Panhandle's own willingness to execute long-term purchase contracts from gas producers.

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, 881 F.2d 1101 (D.C.Cir.1989) (per curiam).

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 the pipeline had itself purchased for resale). Distributors remained ineligible. Application under these programs, as...