Anti-Trust in the New [De]Regulated Natural Gas Industry

ENERGY LAW JOURNAL Volume 18. No . 1 1997 ANTI-TRUST IN THE NEW [DEIREGULATED NATURAL GAS INDUSTRY by John Burrit McArthur* I. INTRODU~ION............................................... I1. ADMINISTRATIVECOMPETITION-FORCING AND NATURAL GASDEREGULATION ........................................ A . The Ancient Regime ..................................... B . The Take-or-Pay Crisis and the Impetus for Change ..... C. Good-by to All That: The Deregulation Orders .......... I11 . THE RISKYBUSINESS OF TOTALDEREGULATION: GAS GATHERINGAND WILLIAMSFIELD SERVICES IN THE SAN JUANBASIN .................................................. IV . THE ANTITRUSTLAWS ARE PREDICATESOF ORDERIN THE DEREGULATEDWORLD ...................................... A . The Retrenchment of Regulation and of Antitrust ........ B . Deregulation Withdraws Shields Against Antitrust Liability .................................................. C. The New Antitrust Theories Do Not Justify Removing All Intervention .............................................. D . The Continuing Focus of Antitrust Regulation ............ 1. Price Discrimination ................................. 2. Monopoly Prices ..................................... 3. Essential Facilities ................................... 4 . Tying ................................................ 5. Joint Violations ...................................... 6. Mergers. .............................................. V . BUILDINGTHE LIGHTER-HANDEDAGENCY ................. A . Direct State Rate Regulation is Not Likely to be Legal or Effective ................................................. 1. The Inefficiency of State-by-State Controls .......... * B.A., Brown University. 1975; M.A. (economics). University of Connecticut. 1978; J.D., University of Texas. 1984. M.P.A., Kennedy School of Government. 1994. The author currently is enrolled in the P~.D.program in public policy at the University of California at Berkeley. 1 ENERGYLAWJOURNAL [Vol. 18:l 2. The Jurisdictional Barrier Against the States ........ 84 B. Customers Need Pipeline Financial Information to Have a Fair Chance in the Deregulated World ................... 86 C. A State/Federal Compact to Maintain Price Oversight .... 93 D. FERC and the States Will Have to Decide How Much to Intervene ................................................. 95 1. Short-Term Complaint Processes .................... 96 2. Regulation and Long-Run Trends ................... 99 VI. BACKTO SOMEBASICS ...................................... 106 This Article explores the evolution of a new regulatory model in the United States. The deregulation movement has produced "a reduction or substantial elimination of regulatory constraints whose scope is unprece- dented in modern American history."l The Article uses natural-gas deregulation to consider the extent and nature of the agency oversight still needed in deregulated markets whose performance deeply affects the public interest. Natural-gas deregulation is a good test case for several reasons. One is that gas deregulation is widely viewed as a successful pro~ess.~The gas example has become a major piece of evidence in the debate over govern- 1. SAM PELTZMAN,The Economic Theory of Regulation after a Decade of Deregulation, in BROOKINGSPAPERS: MICROECONOMICS1989 1 (1989). 2. Consider for instance the contented remarks of Richard Pierce, one of the major intellectual proponents of early and thorough natural gas deregulation: The FERC can take pride in an extraordinary accomplishment. In most respects, [deregulation has exceeded] even initial optimistic expectations. [It has produced] significant rationalization of the gas transportation and storage functions, in addition to the expected beneficial effects on the gas sales market. ...Moreover, the participants in the post-transition market, including many who originally opposed the transition, have discovered that the post- transition market can produce good results for service providers as well as consumers. Richard Pierce, The State of the Transition to Competitive Markets in Natural Gas and Electricity, 15 ENERGYL. J. 323,323-24 (1994). Accord, Robert Hahn & John Hird, The Costs and Benefits of Regula- tion: Review and Synthesis, 8 YALEJ.ON REG. 233,251 (199l)(listing $.2 to $.4 billion in efficiency costs per year from gas regulation, and $5 billion in welfare transfers, which economists, of course, with their detennination not to compare inter-personal utilities, deliberately refuse to value). Though not quite as bullish, the implication of success is inescapable in the Commission's recent pronouncement in its incentive-rate order: "By regulating pipelines in a manner that seeks to ensure all shippers have meaningful access to the pipeline transportation grid, the Commission has created a regulatory environment intended to maximize competition." Statement of Policy and Request for Comments, Alternatives to Traditional Cost-ofservice ratemuking for Natural Gas Pipelines, Docket no. RM95-6- 000, at 3 (Jan. 31,1996)[hereinafter cited as Incentive Rate Order]. The Commission would not be pre- ceding with more experimentation if it believed its earlier efforts were proving to be failures. See also Foster Report No. 2073, Moler Defends FERC's FY 1997 Budget Request Against Any Further Cuts in Staffing of Natural Gas Programs, at 1 (Mar. 28, 1996)(Chair Elizabeth Moler less cautiously claiming "billions and billions of dollars" in savings from Order 636). It can seem as if the Commission has decided that competition should prevail as a matter of ideol- ogy, not because new proof of competitiveness has been brought to its attention. See, e.g., Chairwoman Moler's announcement accompanying Orders 888 and 889, the new electricity deregulation orders: Today's action by the Commission will benefit the industry and consumers to the tune of billions of dollars every year. They will give us an electric industry ready to enter the 21st 19971 NATURAL GAS AND ANTITRUST 3 ment intervention into economic activity. Trends in natural gas have great symbolic importance because gas distribution has been viewed as an archetypal natural monopoly since the last cent~ry.~Many now view the natural gas experience as proof that the state can leave even many components of monopolized industries to the market without encouraging abuses of power.4 Second, large parts of the industry have been completely deregulated. Thus natural gas offers a strong test for the implications of returning realms of activity entirely to the market. Total deregulation should make it easier to spot abuses. Third, institutional as well as cultural reasons (i.e., the Federal Energy Regulatory Commission (FERC) also has jurisdiction over interstate electricity) ensure that reforms like open-access and unbundling will be applied to other industries, starting with ele~tricity.~An imitative intrastate dereg- century. These rules will accelerate competition and bring lower prices and more choices to energy customers. The future is here - and the future is competition. It is a global trend, and in North America, we are at the forefront in embracing it. There is no turning back. FERC, News Release: Commission Orders Sweeping Changes for Electric Utility Industry (Apr. 24, 1996). The fact that something is a "global trend" has never been a reason to embrace it. The issue has been and must remain, what do we know about these markets, how can we tell if they are working, and what do administrative agencies need to do to make those judgments? To some extent, success at achieving deregulating is being confused with the success of deregulation. Many economists have become sure that traditional regulation cannot be an efficient way to gov- em markets. See Michael Fix & George Eads, The Prospects for Regulatory Reform: The Legacy of Reagan's First Term, 2 YALE J. ON REG. 293, 294 (1985)(observing that as early as end of Carter Administration, "a consensus had emerged among many economists and policymakers that economic and social regulation was overly expensive, inflexible, arbitrary, and ineffective"). To some, getting the government out of business decisions is cause enough to proclaim victory. They may overvalue the immediate savings from jettisoning the regulatory structure without considering the risks as pipelines adjust their strategies, prices, and products. They avoid getting dirtied in the empirical question of whether the effects of government withdrawal have been beneficial. 3. Natural gas distribution has a respectable history as the archetypal "natural monopoly" case. See Richard Pierce, Reconstitution the Natural Gas Industry from Wellhead to Burnertip, 9 ENERGYL.J. 1, 2-4 (1988)(discussing John Stuart Mill's use of London's natural gas market in his PRINCIPLESOF POLITICALECONOMY). 4. It probably is no accident that this conclusion comes at the same time economists have been focusing attention on the "transaction" costs underlying what once were viewed as single corporate decisions, analyzing when firms go to the marketplace for goods and services and when they produce goods and services for themselves. The major work, the founding work for economists' conscious study of the make or buy decision, is Ronald Coase's The Nature of the Firm, 4 ECONOMICA386 (1937), reprinted in RONALDCOASE, THE FIRM, THE MARKET,AND THE LAW 33-55 (1988). Coase is a dominant influence on Oliver Williamson, who has extended the model. See, e.g., OLIVER WILLIAMSON,THE ECONOMICINSTITUTIONS OF CAPITALSIM(1985). Principallagent theory and Williamson's transactions

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