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FTC Settlement Agreement Demonstrates Commissioners’ Competing Views on Merger Non-Competes

What Happened

  • DTE and Enbridge’s natural gas pipeline joint venture, Nexus, agreed to purchase the Generation Pipeline (Generation).
  • Generation was owned by a group of sellers including North Coast Gas Transmission (North Coast).
  • Generation’s primary asset is a 23-mile pipeline that serves the Toledo, Ohio, area.
  • North Coast continues to own a competing pipeline near Toledo, Ohio.
  • The purchase agreement contained a non-compete provision that prevented the sellers, including North Coast, from competing in three counties surrounding Toledo, Ohio, for three years.
  • After an investigation, the FTC announced a settlement with DTE, Enbridge and Nexus to remedy the FTC’s concern with the non-compete provision by requiring the purchase agreement to be amended to remove the non-compete provision.
  • The FTC Commissioners were unanimous in their conclusion that the challenged non-compete was unlawfully broad, though several Commissioners issued concurring statements regarding the import of the FTC’s action in this case.


Supreme Court Finds No Pre-emption in Natural Gas Act Case

The U.S. Supreme Court recently held in ONEOK Inc. v. Learjet, Inc., that the Natural Gas Act (NGA) does not pre-empt state-law antitrust suits over manipulation of natural gas indices.  The court’s decision has important ramifications for natural gas regulation and the regulation of the energy industry more broadly.

In ONEOK, a group of direct-sales natural gas customers sued gas pipelines, alleging that the pipelines violated state antitrust laws by reporting false information to privately published market-based price indices, which are used as a tool to determine prices in contracting.  The pipelines, in response, argued that the NGA subjected the conduct to federal oversight that pre-empted the lawsuits.  The justices resolved the issue 7-2 in favor of the direct-sales customers, over a spirited dissent from Justice Scalia in which the Chief Justice joined.

The majority based their reasoning upon Congressional intent in regulating the natural gas industry.  Traditionally, the industry has been regulated in three distinct segments: (1) the production and gathering of gas in the field; (2) the pipelines’ interstate transportation and sale at wholesale of gas to local distributors; and (3) the distributors’ local sale at retail of gas to business and residential customers.  The NGA divides the regulation of the three segments into federal and state domains:  Generally, the Federal Energy Regulatory Commission (FERC) has jurisdiction over the second segment, and the states have jurisdiction over the first and third segments.

In this context, the question of responsibility over regulation of conduct affecting natural gas price indices arises (these indices list the prices at which natural gas has been sold across the country).  Here, the group of direct-sales customers alleged that the pipelines manipulated the market price indices, resulting in excessively high retail prices.  The alleged manipulation of the price indices by the pipelines, however, necessarily affected the wholesale prices for natural gas.  The question for the court, therefore, was whether federal regulation pre-empts state regulation of conduct that affects both retail and wholesale prices for natural gas.

The majority opinion, delivered by Justice Breyer, relied upon U.S. Congress’s “meticulous regard for the continued exercise of state power” through its express designation in the NGA of state authority in regulation of local retail sales.  After distinguishing previous case law relied upon by the dissent, the majority ultimately held that the doctrine of field pre-emption does not bar state antitrust regulation of price indices manipulation in this context, even if such conduct affects wholesale prices.

In dissent, Justice Scalia argued for a “straightforward” application of pre-emption regarding the NGA, relying on precedents suggesting that the test for determining a field pre-empted is simply whether FERC has the exclusive authority over a field of conduct.  Here, the dissent reasoned, FERC has exclusive authority to regulate conduct affecting interstate wholesale gas sales.  Therefore, the state regulation of this conduct, even if it is solely aimed at regulation of intrastate retail gas sales, is pre-empted by the NGA.

This case has several important ramifications for the natural gas industry and energy [...]

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Despite Potential Market Manipulation, FERC Declines to Reject Power Auction Results

The Federal Energy Regulatory Commission (FERC or the Commission) recently opted not to take action to set aside the results of a power auction that was allegedly manipulated.  In the face of significant public complaints, the Commission ordered revisions to tariff provisions governing future auctions.  While it opted not to take action here, the opinions of the commissioners effectively gave notice to capacity owners that rate increases alone may be a sufficient basis for investigating auction results, even if the auction is conducted pursuant to tariff.

The matter involved the impacts of actions taken by an energy provider that altered the outcome of a competitive auction.  Energy Capital Partners, a private equity firm, allegedly exercised and abused market power by announcing the impending shutdown of its coal-fired plant just prior to the auction and after the deadline for new resources to participate (thereby leaving a significant power deficit, triggering certain administrative pricing rules and driving up auction prices).  Multiple consumer groups intervened at FERC, seeking action by FERC to set aside the auction results, asserting that the auction had been manipulated.

FERC has authority to ensure that regional wholesale electricity markets served by regional transmission operators operate competitively.  Pursuant to ISO-New England Inc.’s (ISO-NE’s) applicable tariff, FERC is responsible for determining whether the results of ISO-NE’s annual Forward Capacity Market Auctions—through which power generators bid to sell their future capacity to ISO-NE—are “just and reasonable.”  Intervening consumer advocate groups opposed the capacity rates resulting from FCA-8 (ISO-NE’s most recent auction).

FERC—deadlocked 2-2—allowed FCA-8’s rates to become effective by operation of law and issued statements explaining their positions.  Despite the lack of a formal FERC order, these statements provide insight regarding the commissioners’ opinions on the scope of FERC’s authority, regulatory/rate certainty, market power and the filed rate doctrine.  Under the filed rate doctrine, a regulated entity may not charge a rate “different from the one on file with the Commission” so long as the filed rate was reached via proper implementation of the applicable tariff.[1]

Two commissioners (Clark and Bay), troubled by allegations and evidence of market power abuse, emphasized that FERC must “deter and mitigate market power abuses for the benefit of consumers.”  They further did not see the filed rate doctrine as an obstacle to FERC’s examination of the justness and reasonableness of FCA-8’s rates.  In their view, the Commission should have rejected FCA-8’s rates and taken a closer look by means of fast-tracked hearing and settlement procedures.  They expressed strong objection to “precluding an examination of capacity prices when evidence suggests that the exercise of market power may have contributed to those prices.”

By contrast, the other two commissioners would have accepted FCA-8’s rates as just and reasonable, but their differing approaches are noteworthy.  Chairman LaFleur argued that ISO-NE followed its tariff and that FERC thereby lacks authority to inquire further.  Under that view, any analysis of resulting rates—rather than review only of compliance with the tariff provisions—“would constitute retroactive ratemaking in violation of the [...]

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FTC Staff Comments on New York State Proposal to Transform Power Distribution

In April 2014, the New York Public Service Commission’s (NY PSC) Reforming the Energy Vision (REV) initiative “propose[d] a platform to transform New York’s electric industry . . . with the objective of creating market-based, sustainable products and services that drive an increasingly efficient, clean, reliable, and customer-oriented industry.”  In August 2014, the NY PSC staff submitted for public comment a straw proposal that built on the April proposal, “incorporating subsequent party working group efforts, party comments, and further deliberation by Staff.”

The straw proposal authorizes the establishment of Distributed System Platform (DSP) operators that would be responsible for balancing electricity supply and demand on local, lower-voltage distribution lines.  The NY PSC expects this new structure to lead to innovations such as customer-owned solar arrays, energy storage units and demand reductions offered by customers.  “Distributed energy resources” (DERs), as the innovations are known, would lead to lower costs, increased reliability, improved resiliency and decreased environmental impacts.

Prior to deregulation in New York, the same utility would frequently hold both the means of power generation and distribution, making it difficult for independent generators to access the power grid. Deregulation led to retention of distribution-utility monopolies but increased competition at the power-generation level.

As a proponent of that increased competition and fearing a reversion to an environment of discrimination in access, the staff of the Federal Trade Commission (FTC or the Commission) issued a comment in October 2014 in response to the straw proposal, addressing the potential anticompetitive effects of the new platform.  Specifically, the FTC staff expressed concern regarding the potential effects of a distribution utility serving as its own DSP operator.  Through the potential for “a rebundling of distribution and generation by allowing distribution utilities to invest extensively in DERs,” FTC staff fears that such DSP operators have the incentive and ability to raise the costs and risks for rival independent DERs and foreclose their access to the power grid.  As an alternative, the FTC staff recommends using a competitive procurement process to determine the entities that will serve as the DSP operators.  The FTC staff believes that this bidding process would allow a demonstration of how bidders would keep costs low, remove discriminatory incentives and provide other pro-competitive benefits.

The FTC staff’s comment also encouraged use of one or more independent DSP market monitors to enhance enforcement and monitoring efforts.

The FTC considers the analyzing and advocating for regulatory policies in the electric utility sector among its core competencies.  The comments issued in response to the NY PSC straw proposal reinforce the Commission’s efforts to “encourage policies that promote the interests of consumers and rely on competition as much as possible.”  While it is still unclear what will be the exact effect of these comments, one can conclude that the Commission’s posture toward these markets would be more accommodating if its comments are heeded and a more competitive structure is implemented.

Chinese Magnesite Producers Antitrust Class Action Complaint Dismissed

On July 24, 2014, the district court in Animal Sci. Prod., Inc. et al. v. China Nat’l Metals & Minerals Imp. and Exp. Corp. et al., Case No. 2:05-cv-04376 (D.N.J.), dismissed direct purchaser plaintiff’s Amended Complaint without prejudice in favor of magnesite producers accused of engaging in a price fixing scheme for magnesite and magnesite products sold in the United States.  The court found that the direct purchaser plaintiff, Resco, did not plausibly plead facts to establish antitrust standing as a direct purchaser.  The analysis was complicated by the fact that Resco inherited its claim from an assignor, Possehl (US), and the Amended Complaint contained no facts supporting the allegation that Possehl made direct purchases from the defendants.  The court recommended amending the complaint to identify specific transactions and the governing agreements for those purchases.

The dismissal is another setback for the plaintiffs, who filed suit in 2005 against 17 foreign companies, 16 of which are located in China.  None of the Chinese defendants responded to the complaint and in 2007, and plaintiffs filed a motion for a default judgment.  Seven of the companies responded in 2008 with a motion to compel arbitration.  However, before any of the motions were resolved, the case was administratively closed while the Third Circuit determined the appropriate standard for analyzing whether the district court had jurisdiction to hear the case under the Foreign Trade Antitrust Improvements Act.  The case was reopened in April 2012 and the district court asked for briefing on antitrust standing issues, which resulted in the dismissal of the Amended Complaint.

European Commission Investigates Exemption from Renewable Energy Surcharge for Energy-Intensive Companies in Germany

The European Commission today opened a State aid investigation into the German Renewable Energy Source Act (the EEG), claiming that the EEG may have given unlawful advantages to energy-intensive companies in Germany. These companies now face the potential risk that benefits totalling billions of euros may have to be repaid.

The European Commission (Commission) today opened a State aid investigation into the German Renewable Energy Source Act (the EEG). In its preliminary assessment, the Commission has come to the conclusion that the EEG may have given unlawful advantages to energy-intensive companies in Germany.

The EEG aims to support renewable energy by fixing the tariffs that electricity providers must pay for energy from renewable sources such as solar panels or wind turbines. This is known as the EEG Surcharge and electricity providers are entitled to charge their customers to finance these fixed feed-in tariffs for renewable energy. These tariffs are higher than those for energy from traditional sources. The EEG exempts energy-intensive companies from the EEG surcharge.

The Commission has come to the preliminary conclusion that exemption from the EEG surcharge constitutes State aid for the energy-intensive companies and therefore cannot be authorised. Energy-intensive companies that have benefitted from the exemption face the significant risk of the recovery of the alleged benefit. The potential State aid involved is likely to amount to billions of Euros.

Energy-intensive companies are threatened with recovery orders from two sides:

  • Should the Commission conclude that the exemption from the EEG Surcharge constitutes State aid and therefore cannot be authorised, it will order Germany to recover the advantages from the companies that benefitted.
  • Following a recent ECJ judgment (see McDermott website here), national courts, at the request of interested parties, may also order the recovery of the benefits before the Commission releases its final decision, on the basis of the purely preliminary Commission decision to open the State aid investigation.

Beneficiaries of the exemption from the EEG surcharge should therefore consider whether to appeal the Commission’s decision to open the State aid investigation or to participate in the investigation by commenting on the opening decision and then prepare to bring an action for annulment against the Commission’s final decision at the end of the investigation.

Beneficiaries also have to analyse whether or not, under national law, they are required to set up accruals for the reimbursement of the alleged aid. They are strongly advised to seek legal advice on this point.

The Commission’s investigation into the EEG should be seen in the broader context of its increased focus on State aid in the energy sector. The Commission today published its draft Guidelines on environmental and energy aid for 2014 to 2020 for public consultation. The text is currently not binding, but is supposed to enter into force in 2014. Amongst other things, it covers the compatibility assessment of State aid for renewable energy. The Commission also today opened a State aid investigation into a fixed feed-in tariff for a period of 35-years for the [...]

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FTC Focuses Enforcement Efforts on Health Care, Technology and Energy Sectors

On November 15, 2013, Chairwoman Edith Ramirez testified on behalf of the Federal Trade Commission (FTC) before the House Subcommittee on Regulatory Reform on the topic of antitrust oversight and enforcement.  Ramirez explained that the FTC “focuses its enforcement efforts on sectors that most directly affect consumers, such as health care, technology and energy.”

The FTC has identified health care provider consolidation as a significant component of increasing health care costs, and overseeing provider combinations has remained a key priority for the agency.  The FTC has also undertaken efforts to promote competition between manufacturers of generic and brand-name drugs.  In addition to litigating “pay-for-delay” settlements, the Commission has filed amicus briefs to advocate against other practices it considers anticompetitive, such as “product hopping,” the practice of altering the formula of a brand-name drug in a minor, non-therapeutic way in order to preserve monopoly power in the face of generic competition.

In the technology arena, the FTC has targeted the problem of patent hold-up.  The Commission has pursued enforcement actions aimed at preventing holders of standard essential patents from rescinding agreements to license the patents on reasonable and non-discriminatory (RAND) terms.  The FTC is also actively looking into the potential harms and efficiencies of “patent assertion entities,” which are companies “with a business model focused primarily on purchasing patents and then attempting to generate revenue by asserting the intellectual property against persons who are already practicing the patented technology.”

The Chairwoman noted that the Commission utilizes “all the powers at its disposal” to police competition in the energy sector, and it considers merger review “essential to preserving competition in these markets.”  The agency also monitors gasoline and diesel fuel prices on a daily basis for unusual pricing activity, which could be a sign of anticompetitive conduct.

Department of Justice Launches an Antitrust Investigation into Pressure Pumping Services Used in Hydraulic Fracturing

by Nicole Castle

On July 24, 2013, Baker Hughes, Inc., the owner of the third-largest pressure pumping fleet in the United States, disclosed as part of its filing with the Securities and Exchange Commission that it had received a civil investigative demand (CID) from the Department of Justice (DOJ) on May 30, 2013.  The CID requests information and documents relating to U.S. pressure pumping services for the period from May 29, 2011, through May 30, 2013.  

Baker Hughes stated in its filing that it was “not able to predict what action, if any, might be taken in the future by the DOJ or other governmental authorities as a result of the investigation.”

Pressure pumping services generally refers to the process of pumping water and other materials into a well to break apart rock formations and increase the well’s oil or gas production.   Pressure pumping is the main step in the hydraulic fracturing process, and has in recent years become more heavily used for extracting oil and natural gas from rock formations.

The following day, on July 25, 2013, Halliburton Co., the largest provider of pressure pumping services in the United States., confirmed that it had also received a CID from the DOJ regarding pressure pumping services.  

On Heels of European Raids, Energy Companies Face U.S. Class Actions

by Megan Morley

White Oaks Fund LP, an Illinois private placement fund, filed a class action suit last week against BP PLC, Royal Dutch Shell PLC and Statoil ASA in the Southern District of New York.  White Oaks Fund v. BP PLC, et al., case number 1:13-cv-04553.  The complaint alleges that the energy companies colluded to distort the price of crude oil by supplying false pricing information to Platts, a publisher of benchmark prices in the energy industry, in violation of the Sherman and Commodity Exchange Acts.  Plaintiffs claim that defendant companies are sophisticated market participants who knew that the incorrect information they provided to Platts would impact crude oil futures and derivative contracts prices traded in the U.S.

This action follows at least six civil litigations that have been filed against BP, Shell and Statoil after the European Commission (EC) and Norwegian Competition Authority raided the companies in May.  The London offices of Platts were also searched.  After the surprise raids, the EC has stated that it is investigating concerns that the companies conspired to manipulate benchmark rates for various oil and biofuel products and that the companies excluded other energy firms from the benchmarking process as part of the scheme.  In addition, at least one U.S. Senator has requested that the U.S. Department of Justice look into whether any of the alleged illegal behavior occurred in the U.S.

The private actions filed against these energy companies in the U.S. on the heels of an investigation by the European Commission are not uncommon.  Any company that transacts business in the U.S. and undergoes a raid or investigation by a foreign competition authority should prepare to face these civil litigations and defend itself against similar allegations.

EU State Aid Investigation into German Renewable Energy Law

 by Martina Maier and Philipp Werner

The European Commission (Commission) is likely to open a formal EU State aid investigation into the German Renewable Energy Source Act. According to the Commission, the Act may have given unlawful advantages to renewable energy producers and energy-intensive companies (those producing chemicals or steel) in Germany. Producers and companies that benefited from the Act are therefore exposed to the risk of the alleged benefit being recovered, which is likely to amount to a figure in at least the tens of billions of Euros.

The European Commission is currently examining whether or not the German Renewable Energy Source Act infringes EU State aid law. The Commission is expected to reach a decision on whether or not to open a formal investigation procedure in autumn 2013, following its summer break.

The German Renewable Energy Source Act aims to support renewable energy by fixing the tariffs that electricity providers, such as E.ON, RWE, Vattenfall or EnBW, must pay for energy from renewable sources, e.g., solar panels or wind turbines. These tariffs are higher than those for energy from traditional sources. The Act also exempts energy-intensive companies, e.g., those producing chemicals or steel, from the EEG surcharge that electricity providers are entitled to charge their customers. These higher tariffs and the EEG exemption could be in breach of EU State aid law and are currently the subjects of a Commission examination.

Should the Commission come to the conclusion that they do infringe EU State aid law, it can order Germany to recover the advantages from the companies that benefitted from these rules. The potential State aid involved is likely to amount in total to a double-digit billion Euro figure.

In a separate but similar case, in March 2013 the Commission opened an in-depth investigation into the exemption of large electricity consumers from network charges in Germany, dating back to 2011. This exemption was financed by the final electricity consumers, who, since 2012, must pay a special surcharge. A German court, recently declared this exemption and the surcharge as unconstitutional and the legal provisions will be changed. The Commission may, however, still conclude that, up until the German court ruling, large electricity customers were benefitting from State aid. It could therefore order Germany to recover the past benefit from these customers, which is estimated at around Euro 300 million for 2012.

These investigations by the Commission expose renewable energy producers, energy-intensive companies and large electricity consumers in Germany to the significant risk of the recovery of the alleged benefit. Such companies are therefore strongly advised to co-operate with the Commission during this examination phase and if a full investigation is launched.