State of Ill. ex Rel. Hartigan v. Panhandle Eastern, 84-1048.

• Decision Date: 16 January 1990
• Docket Number: No. 84-1048.,84-1048.
• Citation: 730 F. Supp. 826
• Parties: STATE OF ILLINOIS, ex rel. Neil F. HARTIGAN, Attorney General of the State of Illinois, in its proprietary capacity, in its parens patriae capacity, and in its representative capacity, Plaintiff, v. PANHANDLE EASTERN PIPE LINE COMPANY, a Delaware corporation, Defendant.
• Court: U.S. District Court — Central District of Illinois

730 F. Supp. 826

STATE OF ILLINOIS, ex rel. Neil F. HARTIGAN, Attorney General of the State of Illinois, in its proprietary capacity, in its parens patriae capacity, and in its representative capacity, Plaintiff, v. PANHANDLE EASTERN PIPE LINE COMPANY, a Delaware corporation, Defendant.

No. 84-1048.

United States District Court, C.D. Illinois, Peoria Division.

January 2, 1990.

As Corrected January 16, 1990.

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Neil F. Hartigan, Atty. Gen., Burke and Smith Chartered, Edward J. Burke, Raymond J. Smith, Mary Patricia Burns, Freeborn and Peters, William C. Holmes, Chicago, Ill., David M. Lynch, Peoria, Ill., for plaintiff.

Chadwell & Kayser, Paul H. LaRue, Juris Kins, Gregory G. Wrobel, James M. Mrowicki, Andrew M. Gardner, Chicago, Ill., Panhandle Eastern Pipe Line Co., John A. Sieger, Marge Connor, Michael A. Kelly, Irwin A. Bain, Houston, Tex., Heyl, Royster, Voelker & Allen, Mark Howard, Peoria, Ill., for defendant.

MEMORANDUM OPINION

MIHM, District Judge.

I. INTRODUCTION

This is an antitrust case. The Plaintiff, the State of Illinois, is suing in its proprietary capacity on behalf of certain state facilities, in its parens patriae capacity on behalf of all natural persons in the certified class below, and in its representative capacity on behalf of other indirect purchasers. This class was certified by the Court pursuant to Rule 23, Federal Rules of Civil Procedure, and described as follows:

All indirect purchasers of natural gas from Panhandle Eastern Pipe Line Company ("PEPL") who reside in or are located in those Illinois counties or parts of Illinois counties served exclusively by PEPL's interstate natural gas transmission system.

The area exclusively served by Panhandle involves part or all of 37 counties. Most of the indirect purchasers involved in this case were supplied their natural gas in those areas by three local distribution companies ("LDC's"): Central Illinois Light Company ("CILCO"), Central Illinois Public Service Company ("CIPS"), and Illinois Power Company ("IP").

The Defendant, Panhandle Eastern Pipe Line Company ("Panhandle" or "PEPL"), a Delaware corporation, is an interstate pipeline company. Panhandle's pipeline system moves natural gas from a number of collection points outside the State of Illinois and distributes the gas elsewhere along its system, in Illinois and other states, primarily to LDC's.

The Plaintiff charges that during the time in question, 1981 to the time of trial in 1986/1987, Panhandle engaged in conduct which constituted violations of federal and state antitrust laws. More specifically, Count I (Monopolization of Gas Sales), Count 3 (Attempted Monopolization of Gas Sales), Count 5 (Monopoly Leveraging), Count 7 (Essential Facility), and Count 9 (Illegal Tying) allege violations of Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2, and pray for damages pursuant to Section 4 of the Clayton Act, 15 U.S.C. § 15.

Counts 2, 4, 6, 8, and 10 allege corresponding violations of Section 3 of the Illinois Antitrust Act, Ill.Rev.Stat. ch. 38, ¶ 60-3.

Section 1 of the Sherman Act provides in pertinent part as follows:

Every contract ... in restraint of trade or commerce among the several state ... is declared to be illegal.

15 U.S.C. § 1.

Section 2 of the Sherman Act provides in pertinent part as follows:

Every person who shall monopolize ... any part of the trade or commerce among the several states ... shall be deemed guilty....

15 U.S.C. § 2.

Section 4 of the Clayton Act provides as follows:

Any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue therefor in any district court of the United States in the district in which the defendant resides or is found or has an agent, without respect to the amount in controversy and shall recover threefold the damages by him sustained, and the cost of suit, including a reasonable attorney's fee.

15 U.S.C. § 15.

Prior to trial, Panhandle moved to dismiss all indirect purchaser claims on grounds that such indirect claims were barred by the Illinois Brick doctrine, which prohibits most antitrust claims by indirect purchasers. Illinois Brick v. Illinois, 431 U.S. 720, 97 S.Ct. 2061, 52 L.Ed.2d 707 (1977). This Court denied the Motion to Dismiss, citing the "cost plus exception" to the Illinois Brick doctrine. On interlocutory appeal, a panel of the Seventh Circuit Court of Appeals reversed the Court's denial of the Motion to Dismiss on January 22, 1988. State of Illinois ex rel. Hartigan v. Panhandle Eastern, 839 F.2d 1206 (7th Cir.1988). However, in an en banc decision dated July 18, 1988, the Seventh Circuit held that, while industrial indirect purchasers did not fall within the "cost plus exception" to the Illinois Brick rule, residential/commercial indirect purchasers did, and therefore claims on their behalf would not be dismissed. State of Illinois ex rel. Hartigan v. Panhandle, 852 F.2d 891 (7th Cir.1988), cert. denied, ___ U.S. ___, 109 S.Ct. 543, 102 L.Ed.2d 573 (1988).

This lawsuit was filed on February 7, 1984. On December 13, 1984, after extensive hearing, the Court denied a Motion for Preliminary Injunction filed by Plaintiff. The trial on the merits on the bifurcated issue of liability was heard by the Court from November 17, 1986 to January 30, 1987. The Court stayed the matter during much of the time after trial when the interlocutory appeal was pending.

For the reasons stated in this Opinion, the Court finds in favor of the Defendant and against the Plaintiff on all claims.

This is a complex case, and the Court's ruling on the issue of liability will of necessity involve hundreds of specific findings of Fact and Law.

The Opinion is structured in the following way:

I. Narrative (historical background of the natural gas industry and the events leading up to the disputes between the parties in this case).

II. Findings of Fact (more specific discussion of certain factual bases for the legal conclusions).

III. Conclusions of Law.

NOTE: All matters contained in this Memorandum Opinion are to be considered as findings of the Court, whether the same are found in the Narrative or in the formal Findings of Fact or Conclusions of Law.

References to the injunction hearing and trial testimony are by witness and transcript page number; the injunction hearing and trial transcript have been numbered as one consecutive transcript by the parties. Citations to depositions are to the witness' name and page number. PX citations refer to Plaintiff's Exhibits; DX citations refer to Defendant's Exhibits.

II. NARRATIVE

A. Historical Background of the Natural Gas Industry

Natural gas has for some time been a major source of inexpensive energy in this country. Over time most homeowners, small businesses, and industrial facilities came to meet their heating needs with gas heat.

An interstate pipeline industry developed. Pipeline companies purchased natural gas from producers at the wellhead and moved the gas from the well to distant customers by way of their pipeline systems. Panhandle, for example, purchases gas from extensive acreage located in Texas, Oklahoma, New Mexico, Colorado, Wyoming and offshore in Texas and Louisiana from Trunkline Gas Company ("TKL"). Panhandle's pipeline, with lateral and gathering lines, runs northeastward generally from Oklahoma and Texas to the Detroit, Michigan area. Panhandle sells virtually all of the natural gas it purchases to interstate pipeline companies, industrial endusers, and investor-owned and municipally-owned LDC's serving several states including Central Illinois.

Until 1977, the regulatory agency supervising the natural gas industry was the Federal Power Commission ("FPC"). In that year, the FPC was replaced by the Federal Energy Regulatory Commission ("FERC" or "Commission").

The statutory framework for regulatory control of the industry until 1978 was the Natural Gas Act ("NGA"), 15 U.S.C. §§ 717-717w. Under the NGA, every sale of natural gas for resale and every transportation of natural gas in interstate commerce was subject to federal regulatory oversight. The NGA required that a regulatory body (the FPC) review each sale of gas to ensure that the price was "just and reasonable" and review all transportation facilities and transports of gas in interstate commerce to assure that they were "in the public convenience and necessity." 15 U.S.C. §§ 717c, 717f.

The principal functions of the FERC in rate-making are to determine the costs the pipeline should be allowed to recover from its jurisdictional businesses, to apportion the costs on an equitable basis among the different services that are provided, and to develop rates that will give the pipeline a reasonable opportunity to recover those costs, including an appropriate return on the investment in facilities used to provide the services. (Williams 6365).

The NGA gave the FPC/FERC broad powers to regulate both price and non-price activities of interstate pipelines, defined as "natural gas companies" by 15 U.S.C. § 717a(6). Panhandle is such a natural gas company.

In the years leading up to 1978, Panhandle sold natural gas to LDC's such as CILCO, CIPS, and IP pursuant to tariffs approved by the FPC/FERC, and in conformance with long-term service contracts.

In the late 1960's, a natural gas shortage developed and spread throughout the natural gas industry. This shortage continued into the 1970's and on occasion caused curtailment of delivery of natural gas to LDC's because there was not enough natural gas available to meet demand. Naturally, in such an environment, LDC's and the customers behind them clung to the pipelines serving their customer area. Pursuant to typical contract and tariff arrangements, LDC's such as CILCO agreed that they would normally...