Midcon Corporation

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IN THE MATTER OF MIDCON CORPORATION, ET AL.

MODIFYING ORDER, ETC., IN REGARD TO ALLEGED VIOLATION OF SEC. 5 OF THE FEDERAL TRADE COMMISSION ACT Docket 9198. Consent Order, Feb. 6, 1986—Modifying Order, Aug. 31, 1988 This order reopens the proceeding and modifies the Commission’s consent order issued on Feb. 6, 1986 [107 F.T.C. 48], by removing a requirement that the company divest its interests in the Acadian Gas Pipeline System. ORDER MODIFYING ORDER ISSUED FEBRUARY 6, 1986 On July 8, 1988, Midcon Corporation (““Midcon’”) filed a Request To Reopen Proceeding and Modify Order (‘“‘request’’), pursuant to Section 5(b) of the Federal Trade Commission Act, 15 U.S.C. 45(b), and Section 2.51 of the Commission’s Rules of Practice, 16 CFR 2.51, asking that the Commission reopen and modify the consent order in Docket No. 9198 (“order”). The order requires Midcon, among other things, to divest its interest in five natural gas pipelines (“Schedule A Properties”) in the area between Baton Rouge and New Orleans, Louisiana (“Baton Rouge-New Orleans Corridor” or ‘“Corridor’’). In its request, Midcon asks that the Commission reopen the order and set aside the requirement that Midcon divest the Schedule A Properties. Midcon asserts that the sale of the common stock of United Gas Pipeline Company (“United”) and UER Marketing Company (““UER Marketing’’) to Lasalle Energy Corporation (“La- Salle”) on June 30, 1987, together with Commission adoption of two additional order provisions that Midcon proposes relating to agreements between Midcon and Lasalle, will accomplish the remedial purposes of the order in Docket No. 9198. Midcon submits that “‘these circumstances [i.e the sale to Lasalle and the proposed order provisions] constitute changed conditions of fact sufficient to warrant reopening this proceeding to modify the order” to set aside the divestiture requirement. Midcon also claims that the sale to Lasalle, together with the order modifications proposed by Midcon, satisfy the public interest [2] concerns that led the Commission to issue the order 100 Modifying Order in this matter and that "it would be inequitable" in the circumstances to require Midcon to divest the Schedule A Properties. BACKGROUND On February 6, 1986, the Commission issued the order in this matter, requiring Midcon to divest the Schedule A Properties within one year from the date the order became final. The purpose of the divestiture was to remedy the lessening of competition and increase in concentration in the transportation and sale of natural gas in the Baton Rouge-New Orleans Corridor that the Commission believed would result from Midcon s acquisition of United Energy Resources Inc. ("UER"), as alleged in Count Two of the Commission complaint. The order became final on February 26, 1986. Midcon has not divested the Schedule A Properties.

On June 30 , 1987, Midcon s subsidiary, UER, sold the common stock of United and UER Marketing to Lasalle, a newly formed corporation. In partial payment of the purchase price, UER accepted a promissory note from Lasalle. The note provides that Midcon wil acquire an equity interest in Lasalle in the event that Lasalle fails to meet its payment obligations. In addition to its note indebtedness to Midcon, Lasalle assumed substantial potential liabilities arising from the contract obligations of United.

Midcon and Lasalle also entered into a Master Agreement on Transportation ("Transportation Agreement"), in which Midcon guaranteed certain revenues to Lasalle for a period of years and Lasalle agreed to transport gas for Midcon on the United pipeline system. To ensure that Lasalle would not grant more favorable terms to other shippers than to Midcon, Midcon and Lasalle agreed to a most-favored-nation " provision that prevents Lasalle from (3) charging a higher price to Midcon than to other shippers for reasonably comparable shipments.

On July 23, 1987, Midcon fied a request to reopen the proceeding and modify the order to set aside the requirement that Midcon divest the Schedule A Properties. The Commission denied the request on On February 25, 1987, Midcon requested an exlcnsion of time to accomplish divesliture under the order. On April 28, 1987 , Midcon supplemented its request for an extension of time, disclosing the proposed sale of the United assets to Lasalle and asserting that the proposed sale would accomplish the remedial purpses of the order. The Commission denied the request for an extension, noting that the appropriate procedure for proposing a divestiture different from that required by an order is by a request to reopen and modify the order so that the Commission may consider whether the alternative divestiture is sufficient to accomplish the remedial purpses of the order and thereby obviate the need for the remedy provided in the order. Letter to PrisciHa Mims, Esq., Midcon Corpration (June 26 , 1987) (unpublished). Modifying Order 111 F.

December 11 , 1987. The Commission stated that the substantial and continuing financial and contractual commitments between Midcon and Lasalle would reduce the parties' incentives and ability to compete in the Corridor, that Midcon had failed to est'lblish that Lasalle would be an independent, viable competitor in the Corridor and that Midcon had failed to establish that the sale of United to Lasalle would achieve the remedial purposes of the order. See Letter to Priscila Mims, Esq., Midcon Corporation (December 11 , 1987) Midcon Letter ) (unpublished).

In its request filed on July 8 , 1988, Midcon again asks that the Commission reopen and modify the order to set aside the requirement that Midcon divest the Schedule A Properties. As in its earlier request, Midcon asserts that the sale of United to Lasalle eliminates the horizontal overlap between United and the Schedule A Properties in the relevant market. In addition, Midcon asks that the Commission modify the order to require Midcon to divest absolutely within nine months from the date of acquisition, subject to the prior approval of the Commission, any Lasalle stock that Midcon may acquire pursuant to the terms of the promissory note. Midcon also asks that the Commission modify the order to prohibit Midcon from invoking the most-favored-nation" clause of the Transportation Agreement in the Corridor. Finally, Midcon has supplied information that it claims attests to the financial viability of Lasalle. Midcon asserts that under these circumstances the sale of United to Lasalle restores United as a viable competitor in the Corridor and accomplishes the remedial purposes of the order.

STANDARDS FOR REOPENING A FINAL ORDER Section 5(b) of the Federal Trade Commission Act, 15 U. C. 45(b), provides that the Commission shall reopen an order to consider whether it should be modified if the petitioner "makes a satisfactory showing that changed conditions of law or fact require such order to be altered, modified, or set aside in whole or in part. " A satisfactory showing sufficient to require reopening is made when a request to reopen identifies significant changes in circumstances and shows that the changes eliminate the need for the order or make continued application of the order inequitable or harmful to competition. See Louisiana-Pacific Corp. Docket No. C-2956, Letter to John C. Hart (June 5, 1986) (unpublished). The burden is on the petitioner to make the satisfactory showing of changed conditions required by the 100 Modifying Order statute. This burden is not a light one, in view of the public (4) interest in repose and the finality of Commission orders. See Federated Department Stores, Inc. v. Moitie 425 U.S. 394 (1981) (strong public interest considerations support repose and finality). If the Commission determines that the petitioner has made the necessary showing, the Commission must reopen the order to consider whether modification is required and, if so, the nature and extent of the modification. Section 5(b) also provides that the Commission may modify an order when the Commission determines that the public interest so requires. Respondents are therefore invited in petitions to reopen to show how the public interest warrants the requested modification. In such a case, a petitioner must demonstrate as a threshold matter some affirmative need to modify the order. Once such a need has been shown, the Commission wil weigh the reasons favoring the modification requested against any reasons not to make the modification. See Damon Cor. Docket No. C-2916, Letter to Joel E. Hoffman, Esq. (March 24 , 1984), at 2 (unpublished); see also Chevron Corp. Docket No. C-3147 , 105 FTC 228 (1985) (public interest warrants modification where potential harm to respondent's ability to compete outweighs any further need for the order). The Commission also wil consider whether the particular modification sought is appropriate to remedy the identified harm.

THE PUBUC INTEREST WARRANTS MODIFICATION OF THE ORDER The Commission has determined that it is in the public interest to reopen and modify the order to set aside the requirement that Midcon divest the Schedule A Properties. The sale of United to Lasalle together with the additional order provisions proposed by Midcon to address the Commission s concerns that Midcon and Lasalle would not compete aggressively in the Corridor and that Lasalle would not be an independent, viable competitor in the Corridor, appear to be sufficient to remedy the lessening of competition and increase in concentration alleged in count two of the complaint. Divestiture of the Schedule A Properties as required by the order would result in Midcon s exit from the relevant market, which is no longer necessary in light of Midcon s proposed additions to the order and the additional information regarding Lasalle s viability. (5) The Commission was concerned that Midcon could acquire an 2 Midcon has not made a satisfactory showing of changed conditions of fact that require reopening of the order. Because of the continuing- connections between Midcon and LaSaUe and the issues relating to Lasalle viability, the sale of United does not achieve the remedy ordered by the Commission.'J'ee Midcon Letter at 3- Modifying Order 111 F.

interest in United as a result of Midcon s retained security interest under the promissory note. Such an interest would be inconsistent with the remedial purpose of the order to eliminate the horizontal overlap and to reestablish the assets divested by Midcon as an independent competitive entity. A new order provision proposed by Midcon would require Midcon to divest, within nine months from the date of acquisition and subject to the prior approval of the Commission, any stock of Lasalle that it may acquire by operation of the promissory note or any other security interest. The proposed provision would prevent the possibility that Midcon could control or influence Lasalle in the event that Midcon obtains Lasalle stock pursuant to the security interest.

The Commission was concerned that Lasalle s incentives to compete aggressively with Midcon for transportation of natural gas might be deterred by the requirement of the Transportation Agreement that Lasalle transport natural gas for Midcon on the same terms that Lasalle offers to any third parties. A new order provision proposed by Midcon would preclude Midcon s use of the "most-favored-nation clause of the Transportation Agreement in the Corridor and thereby reduce the potential deterrent effect of the Transportation Agreement on competition. As modified, the Transportation Agreement would no longer provide a disincentive for Lasalle to compete aggressively with Midcon in the Corridor.

The Commission also was concerned that the financial viabilty Lasalle had not been demonstrated by Midcon, particularly in view of Lasalle s assumption of United' s substantial potential liabilities and Lasalle s undertaking considerable debt obligations to finance the acquisition of United, including the promissory note to Midcon. Midcon has submitted financial statements of Lasalle, showing that Lasalle has operated United successfully during the past year. Lasalle has had positive operating revenue and has been able to meet its debt obligations following the acquisition of the United assets. In addition the changes in the Transportation Agreement that eliminate possible disincentives for Lasalle to compete in the (6) Corridor may enhance Lasalle s abilty to compete and, therefore, its viability. CONCLUSION For the reasons described above, the Commission has determined to 3 In addition, Midcon and LaSaHe have amended the Transportation Agrement to limit the operation of the most-favored-nation" clause outside the Corrdor. Midcon has represented that the amendment, section 7. of the Transportation Agrement, becomes . effective if the order is modified as requested by Midcon. In granting Midcon s request to modify the order, the Commission has rdied on this representation by Midcon. (g) lVllUlJU1 lJUltt'U1iATIUN , r.T AL. IUD 100 Modifying Order reopen and modify the order to set aside the requirement that Midcon divest the Schedule A Properties. Therefore, the order wil be modified to set aside the requirement that Midcon divest the Schedule A Properties and to incorporate the other changes set forth below. (7) Accordingly, it is ordered that this matter be reopened and that the Commission s order in Docket No. 9198, issued on February 6, 1986 be modified, as of the date of service of this order, as follows: 1. The terms "Lasalle stock" shall be substituted in every case for the term "Schedule A Properties" or "Properties" in paragraphs III through VII.

2. The term "9-month" shall be substituted in every case for the term "12-month" in paragraphs III through VII. 3. Paragraph I shall be modified by replacing paragraph I.(c) with the following:

(c) Midcon means Midcon Corp. , its parent, subsidiaries divisions, groups and affiliates controlled by Midcon and their respective directors, officers, employees, agents and representatives, and their respective successors and assigns. 4. Paragraph I shall be modified to add the following: Lasalle means Lasalle Energy Corp. , its subsidiaries divisions, groups and affiliates controlled by Midcon and their respective directors, officers, employees, agents and representatives, and their respective successors and assigns. 5. Paragraph I shall be . modified to add the following: (h) Transportation Agreement" means the Master Agreement on Transportation executed between Midcon and Lasalle on June 30, 1987. (8) 6. Paragraph II shah be modified by replacing paragraph II.(A) with the following:

(A) In the event Midcon, as a result of the operation of any promissory note, mortgage, bona fide lien, deed or trust or other form of security interest, executed in connection with the sale of United Gas Pipeline Company and UER Marketing Company to 4 Occidental Petroleum Corporation acquired Midcon on April 1 , 1986. Occidental has agred to be bound as Midcon s parent by the tenns of the order in Docket No. 9198. Letter from Samuel Wolfson, Esq., Assistant General Counsel, Occidental Petroleum Corp., to Elliot r' einberg, Assistant Director, Bureau of Competition Federal Trade Commission (July 5 , 1988). Modifying Order 111 F.T.C.

Lasalle, acquires, directly or indirectly, any Lasalle stock, Midcon shall, within ten (10) days, notify the Commission in writing and shall divest the acquired stock, absolutely and in good faith, in accordance with paragraphs II through VII of this order within nine (9) months of the acquisition. 7. Paragraph II shall be modified by replacing paragraph II.(B) with the following:

9.

with (B) Divestiture of the Lasalle stock shall be made only to an acquirer or acquirers and only in a manner that receives the prior approval of the Federal Trade Commission. The purpose of the divestiture of the Lasalle stock is to ensure the continuation of the assets, interests and pipelines as ongoing, viable enterprises engaged in the same business in which they are presently employed and to remedy the lessening of competition resulting from the Acquisition as alleged in count two of the Commission’s complaint.

A new paragraph VIII shall be added:

It is further ordered, That Midcon cease and desist from taking any action to implement or otherwise enforce Section 3.5 (regarding rates for comparable natural gas transportation services) of the Transportation Agreement with respect to the shipment or transportation of any natural gas by Lasalle to any delivery point within the New Orleans—Baton Rouge Corridor. [9] Paragraph III shall be modified by replacing paragraph III.(C) the following:

(C) Midcon through its ownership of Lasalle stock shall not take any action to impair the viability of LaSalle’s business. 10. Paragraph IV shall be modified by replacing paragraph IV with the following:

It is further ordered, That, within sixty (60) days after giving the Commission notice required by paragraph II of this order and every sixty (60) days thereafter until Midcon has fully complied with the provisions of paragraphs II and III of this order, Midcon shall submit to the Commission a verified written report setting forth in detail the manner and form in which it intends to 100 Concurring Statement comply, is complying or has complied with those provisions. Midcon shall include in compliance reports, among other things that are required from time to time, a full description of contacts or negotiations for the divestiture of properties specified in paragraphs II of this order, including the identity of all parties contacted. Midcon also shall include in its compliance reports copies of al1 written communications to and from such parties and all internal memoranda, reports and recommendations concerning divestiture. (10) 11. Paragraph V shall be modified to include the following sentence at the end of the first paragraph:

The provisions of this paragraph shall not apply to the acquisition by Midcon of any LaSal1e stock through the operation of any promissory note, mortgage, bona fide lien, deed or trust or other form of security interest executed in connection with the sale of United Gas Pipeline Company and UER Marketing Company to LaSal1e.

CONCURRING STATEMENT OF CHAIRMAN DANIEL OUVER In September 1985 the Commission issued the complaint in this matter, challenging Midcon s acquisition of the United Gas Pipeline Company ("United" l Count II of the complaint alleged that the acquisi'cion might substantially lessen competition in the transmission of natural gas in the area between Baton Rouge and New Orleans (the Corridor ). In February 1986 the Commission settled count II by accepting a consent order which permitted Midcon to retain the United pipeline assets in the Corridor, but required Midcon to divest other natural gas pipeline interests in the same market (the "Acadian Partnership " interests).

In June 1987 Midcon sold United to Lasalle Energy Corporation. As a result, Midcon and United are once again competitors in the Corridor. Midcon subsequently filed a petition to modify the consent order to permit it to retain its Acadian Partnership interests. The Commission denied the petition in December of last year. I dissented from that decision because, in my view, Midcon s sale of United 1 MidCrm Cor., 107 ITC 48 (1986) (consent order). The complaint actuaHy addressed the acquisition of United Energy Resources ("UER"), but the acquisition of United-the pipeline subsidiary of UER-was the g-ravamen of count II of the complaint. ld. at 52- 54. 1d. at 56. Count I of the complaint is currently in administrative litigation. Concurring Statement 111 F. effectively eliminated any competitive problems that its earlier acquisition of United might have created. The Commission staff and Midcon have now been able to negotiate additional modifications that have led a majority of the Commission to agree to delete the divestiture requirement. Although I do not believe that those additional modifications are necessary, I support the Commission decision to relieve Midcon of any additional divestiture obligations.

( l'l.lliUl'11\L l!!l\ L;UMl'AN Y IV:! 109 Set Aside Order