[Federal Register Volume 64, Number 14 (Friday, January 22, 1999)]
[Notices]
[Pages 3551-3571]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-1393]


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DEPARTMENT OF JUSTICE

Antitrust Division


Public Comments and Response of the United States; United States 
v. Enova Corporation

    Notice is hereby given pursuant to the Antitrust Procedures and 
Penalties Act, 15 U.S.C. 16(b)-(h), that public comments and the 
response of the United States thereto have been filed with the United 
States District Court for the District of Columbia in United States v. 
Enova Corporation, Civil No. 98-CV-583 (RWR).
    On March 9, 1998, the United States filed a Complaint seeking to 
enjoin a transaction in which Pacific Enterprises (``Pacific'') would 
merge with Enova Corporation (``Enova''). Pacific is a California gas 
utility company and Enova is a California electric utility company. 
Enova sells electricity from plants that use coal, gas, nuclear power, 
and hydropower. Pacific is virtually the sole provider of natural gas 
transportation and storage services to plants in southern California 
that use natural gas to produce electricity. The proposed merger would 
have created a company with both the incentive and the ability to 
lessen competition in the market for electricity in California. The

[[Page 3552]]

Complaint alleged that the proposed merger would substantially lessen 
competition in the market for electricity in California, in violation 
of Section 7 of the Clayton Act, 15 U.S.C. 18.
    Public comment was invited within the statutory sixty-day comment 
period. The two comments received, and the responses thereto, are 
hereby published in the Federal Register and filed with the Court. 
Copies of the Complaint, Stipulation and Order, Proposed Final 
Judgment, Competitive Impact Statement, Public Comments, and 
Plaintiff's Response to Public Comments are available for inspection in 
Room 215 of the U.S. Department of Justice, Antitrust Division, 325 
Seventh Street, NW., Washington, DC 20530 (telephone: (202) 514-2481) 
and at the office of the Clerk of the United States District Court for 
the District of Columbia, 333 Constitution Avenue, NW., Washington, DC 
20001. Copies of these materials may be obtained on request and payment 
of a copying fee.
Constance K. Robinson,
Director of Operations, Antitrust Division.

    United States of America, U.S. Department of Justice, Antitrust 
Division, 325 Seventh Street, NW., Suite 500, Washington, DC 20530, 
Plaintiff, v. Enova Corporation, 101 Ash Street, San Diego, CA 
92101, Defendant.

[Case Number: 98-CV-583 (RWR); Judge Richard W. Roberts]

Plaintiff's Response to Public Comments

    Pursuant to the requirements of the Antitrust Procedures and 
Penalties Act (``APPA''), 15 U.S.C. 16(b)-(h) (``Tunney Act''), the 
United States hereby responds to the two public comments received 
regarding the proposed Final Judgment in this case.

I. The Complaint and Proposed Judgment

    The United States filed a civil antitrust Complaint on March 9, 
1998, alleging that the proposed merger of Pacific Enterprises 
(``Pacific''), a California natural gas utility, and Enova Corporation 
(``Enova''), a California electric utility, would violate Section 7 of 
the Clayton Act, 15 U.S.C. 18. The Complaint alleges that as a result 
of the merger, the combined company (``PE/Enova'') would have both the 
incentive and the ability to lessen competition in the market for 
electricity in California and that consumers would be likely to pay 
higher prices for electricity.
    The Complaint further alleges that prior to the merger, Pacific's 
wholly owned subsidiary, Southern California Gas Company, was virtually 
the sole provider of natural gas transmission and storage to natural 
gas-fueled electric generating plants in Southern California (``gas-
fired plants''). As a consequence and without regard to the merger, it 
had the ability to use that market power to control the supply and thus 
the price of natural gas available to the gas-fired plants. Prior to 
the merger, however, Pacific did not own any electric generation 
plants, so it did not have the incentive to limit its gas 
transportation, sales or storage or to raise the price of gas to 
electric utilities in order to increase the price of electricity.
    The Complaint alleges that in early 1998, the California electric 
market experienced significant changes as the result of a legislatively 
mandated restructuring. In this new competitive electric market, gas-
fired plants, which are the most costly electric generating plants to 
operate, set the price that all sellers receive for electricity in 
California in peak demand periods. Thus, if a firm could increase the 
cost of the gas-fired plants by raising their fuel prices, it could 
raise the price all sellers of electricity in California receive, and 
increase the profits of owners of lower cost sources of electricity.
    Based on these facts, the Complaint alleges that the merger 
violated Section 7 of the Clayton Act because the acquisition of 
Enova's low-cost electric generating plants gave Pacific a means to 
benefit from any increase in electric prices. The Complaint challenges 
the acquisition of these specific plants:

    Once Pacific's pipeline is combined with Enova's low cost 
electricity generation facilities, PE/Enova would have the ability 
to raise the pool price of electricity either by (a) limiting the 
availability of natural gas to competing gas-fired plants that 
supply the most expensive units of electricity into the pool, or (b) 
by limiting gas or gas transportation to gas-fired plants that are 
more efficient and would otherwise have kept the pool price for 
electricity down. PE/Enova would have the incentive to raise the 
pool price after the merger because, through its ownerships of low 
cost generation facilities, it could profit substantially from any 
increase in the pool price of electricity and its incremental 
profits would more than offset any losses of gas transportation 
sales that would result from withholding gas from competing gas-
fired plants. PE/Enova thus will have the incentive and ability to 
lessen competition substantially and increase the price of 
electricity in California during periods of high demand.

(Compl. para.24 (emphasis added).)

    The proposed Final Judgment directly remedies this harm by 
requiring Enova to divest its low-cost generating units to a purchaser 
or purchasers acceptable to the United States in its sole discretion. 
These divestiture assets are the Encina and South Bay electricity 
generation facilities owned by Enova and located at Carlsbad and Chula 
Vista, California, and include all rights, titles and interests related 
to the facilities.\1\ By requiring this divestiture, the incentive that 
was created by the merger for PE/Enova to raise electricity prices is 
removed, providing a full remedy to the harm alleged in the 
Complaint.\2\
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    \1\ The Final Judgment provides that the approvals by the United 
States required by this decree for sale of these assets are in 
addition to the necessary approvals by the California Public 
Utilities Commission (``CPUC'') or any other governmental 
authorities for the sale of such assets. Enova must submit required 
applications to divest the assets no later than ninety days after 
entry of the Final Judgment, and complete the divestiture as soon as 
practicable after receipt of all necessary government approvals, in 
accordance with the proposed Final Judgment.
    \2\ As explained in the Competitive Impact Statement (``CIS''), 
the decree does not require the divestiture of the merged company's 
nuclear assets, as the price of electricity from those assets will 
be regulated during the cirtical first years of the decree, which 
means that ownership of those assets will not give the merged firm 
an incentive to raise prices. In 2001, if the nuclear power prices 
become deregulated, the decree provides for safeguards to ensure 
that any incentive to use these assets to raise price is minimized 
or eliminated.
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    As part of the settlement, the United States also obtained the 
Defendant's agreement to protection that are beyond those needed to 
remedy directly the harm created by the acquisition. The proposed 
decree includes limitations on PE/Enova's ability in the future to 
acquire other low cost gas-fired generating assets that could give the 
merged firm the same incentive and opportunity to raise electricity 
prices that the acquisition of the divested Enova assets would have 
presented. Recognizing that PE/Enova would have numerous acquisition 
opportunities over the next few years as a consequence of the State of 
California's orders that many generating assets be divested (see CIS at 
13), the proposed decree requires PE/Enova to seek prior approval from 
the United States before acquiring ownership or ownership-like rights 
to other low-cost, California generating assets. The United States can, 
at its sole discretion, disallow any acquisition of such assets, 
without incurring the costs and risks of litigation.\3\ The types of 
transactions

[[Page 3553]]

subject to this prior approval process include outright acquisition of 
any existing California Generating Assets (Final Jmt. Sec. V.A.1); any 
contract that allows PE/Enova to control such assets (Final Jmt. 
Sec. V.A.2); any contract for the operation and sale of the output from 
generating facilities owned by the Los Angeles Department of Water and 
Power (``LADWP''), the second largest generator of electricity in 
California and an entity owning more generation than Enova even prior 
to the divestiture (Final Jmt. Secs. V.A.2, II.B); power management 
contracts of California Generating Facilities with the LADWP (Final 
Jmt. Secs. V.C.4,II.C); and future tolling arrangements of the type 
that would most clearly mimic true ownership of the tolled facilities 
(Final Jmt. Secs. V.A.2, V.C.3).
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    \3\ The Final Judgment does not prevent PE/Enova from building 
new capacity in California, or from acquiring capacity built in 
California after January 1, 1998. New capacity will only be built in 
California if the output is inexpensive enough to be sold in many 
hours. By increasing the amount of less expensive power available to 
meet demand, new, low-cost capacity will reduce the number of hours 
in which the most costly gas-fired capacity is needed. This in turn 
will limit PE/Enova's ability to raise the pool price since it is 
more costly and difficult for PE/Enova to restrict gas to more 
numerous low-cost plants. For the same reasons, the Final Judgment 
allows the merged company to acquire or gain control of plants that 
are rebuilt, repowered, or activated out of dormancy after January 
1, 1998. Output from such plants is the equivalent of output from 
new-build capacity. CIS at 13-14.
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    In addition, the United States has the ability to monitor PE/
Enova's entry into many power management contracts not subject to prior 
approval (Final Jmt. Sec. V.C.5). The United States thus has the 
opportunity to review these contracts, which are relatively new in the 
deregulated California market, and determine whether they would give 
PE/Enova the same incentive to raise electricity prices that ownership 
of the divested Enova assets would have created. The United States can 
then challenge any contracts that would do so.
    In sum, the decree provides two types of relief for the United 
States. First, it achieves a direct remedy for the harm caused by 
Pacific's acquisition of Enova's low-cost generating assets by ordering 
divestiture of those specific assets. Second, it provides the 
additional benefits of the prior approval and contract monitoring 
provisions. These additional provisions are not meant to (nor can they) 
prevent PE/Enova from entering any transaction or acquiring any asset 
that could give it the incentive to exploit Pacific's pipeline market 
power in the electricity market. Instead they provide the United States 
with a check on potentially anticompetitive transactions, where the 
acquisition of such assets would again create incentives similar to 
these created by the assets acquired (and divested) in the transaction 
before this Court.
    The United States and Enova have stipulated that the proposed Final 
Judgment may be entered after compliance with the APPA.

II. Response to Public Comments

    On June 8, 1998, the United States filed the CIS in this docket and 
on June 18, 1998, the Complaint, Final Judgment and CIS were published 
in the Federal Register. The Federal Register notice explained that 
interested parties could provide comments to the Department for a 
period of 60 days. Two parties filed comments with the Department: 
Edison International (``Edison'') and the City of Vernon.
A. Edison's Comments
    Edison's primary comment is that the decree does not strip PE/Enova 
of the ability or incentive to increase electricity prices, but only 
eliminates one opportunity to do so. Despite the decree, Edison argues, 
PE/Enova still can use Pacific's market power over natural gas 
transmission and still can enter into transactions that will give it 
the incentive to exercise that power and raise electricity prices. 
Edison enumerates and discusses particular transactions that would give 
Pacific that incentive:
    1. Building or acquiring new or repowered generating facilities;
    2. Entering into tolling agreements;
    3. Entering into power generation management contracts; and
    4. Entering into financial contracts (derivatives) tied to prices 
in the California Electric market.
    But Edison's criticism misses the mark, because each of the 
potential transaction it lists is a transaction that Pacific could 
engage in whether or not it merges with Enova. Thus, Edison's comments 
do not focus on the harm caused by the merger, but rather on the harm 
to competition that might result from Pacific's premerger ownership of 
a monopoly gas pipeline. In contrast, the United States' Complaint is 
focused only on the effects that flow from the merger.
    Edison's assertion (Edison Comments at 13) that Pacific had no 
premerger incentive to manipulate electricity prices is simply wrong. 
As soon as California deregulated retail electricity prices, Pacific 
had the incentive, among other things, to build or acquire new and/or 
repower other existing generating assets, purchase derivatives, and 
make gas tolling agreements in order to exploit its pipeline's market 
power over gas-fired generators. The ability and incentive of Pacific 
to exercise its natural gas transmission market power for gain in the 
electric market in any of these manners does not require acquisition of 
any of Enova's generating assets or its ``electricity expertise.'' \4\
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    \4\ Edison's comments, which mention Enova's ``electricity 
expertise'' in one sentence, do not define this term, identify where 
in Enova it resides, or assert that pacific, the pipeline's parent 
company, did not already have such expertise prior to the merger or 
have the ability to obtain it by a number of means, including hiring 
employees with electric experience.
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    Nevertheless, Edison argues that the Final Judgment is defective 
because the United States did not also  ``understand[  ], anticipat[e], 
and then prohibit[  ] all the various means by which the merged company 
could seek to retain or create incentives to earn profits through 
electricity price manipulations.'' (Edison Comments at 20.) To the 
extent that Edison means to suggest that, once any merger transaction 
is found to violate the Clayton Act, a merger decree should enjoin any 
and all other means by which the defendant might violate the antitrust 
laws in the future, the suggestion plainly is incorrect.\5\ Contrary to 
Edison's suggestions, enforcement of the merger laws, Section 7 of the 
Clayton Act, is aimed at remedying the competitively harmful changes in 
market structure or other conditions that result from the merger. Here, 
the merger takes Pacific's ability to profitably raise electric prices 
and adds the incentive provided by Enova's low cost generating assets. 
The proposed decree severs those assets from the merged company, 
remedying the change in incentive and ability from the status quo ante. 
The Final Judgment requires these assets to be sold to a party that 
will not own the monopoly pipeline and removes the new incentive 
provided by the acquired Enova assets for PE/Enova to use the 
pipeline's already existent market power.\6\
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    \5\ See Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 
100, 133 (1969) (explaining that a court may not enjoin ``all future 
violations of the antitrust laws, however unrelated to the violation 
found by the court''); Hartford-Empire Co. v. United States, 323 
U.S. 386, 409-10 & n.7 (1945) (citing NLRB v. Express Publ'g Co., 
312 U.S. 426, 433, 435-36 (1941)).
    \6\ Edison also makes the same argument from the opposite 
perspective--that competition is separately harmed because Enova has 
gained an ability via the merger to raise price. (Edison Comments at 
5.) Again, there is no additional pipeline monopoly power created by 
the merger. The proposed remedy is effective against the harm caused 
by the combination (the pipeline and Enova's low cost generating 
assets), whether the Southern California Gas Company pipeline's 
monopoly power is wielded by Enova or by Pacific.
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    Just as Edison's critical comments do not address the merger-
related harms alleged in the Complaint, its comments do not address 
whether the parties' proposed decree is adequate to remedy the harms 
alleged in that Complaint. Instead, Edison proposes its own alternative 
remedies that either do not

[[Page 3554]]

address the harm caused by the merger, or are not as effective as the 
decree. Edison suggests that: (1) The merger be rescinded, (2) the 
pipeline be divested, (3) the pipeline be controlled by an independent 
system operator, or (4) the merged company be barred from trading in 
financial instruments for Southern California electricity markets 
(Edison Comments at 6).\7\
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    \7\ Edison compares its preferred options with the proposed 
Final Judgment, calling the remedy in the proposed Final Judgment 
``the least attractive option'' from Edison's perspective. (Edison 
Comments at 3 (``The last but least attractive option is to try to 
lessen the merged firm's incentive to exercise its monopoly power in 
order to profit from higher electric prices.'').) Edison finds this 
course less attractive because ``it requires a complex latticework 
of provisions * * * [that is] difficult to write and even harder to 
administer.'' Id. The alternative it suggests, creating an 
independent system operator for the pipeline system, has never been 
done anywhere in the United States and, while possible, cannot be 
assumed to be easy to write and easier to adminster.
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    Two of Edison's proposed remedies--the independent system operator 
and the bar on trading--are aimed at controlling the preexisting market 
power of the gas pipeline rather than remedying any harm created by the 
merger. And, ironically, the Edison remedies aimed most closely at the 
merger--rescission or divestiture of the pipeline--would not place any 
limits on the pipeline's new owner's ability to raise the price of 
electricity or limit the pipeline owner from acquiring assets or 
contracts that would give it the incentive to do so, even though this 
incentive and ability is purportedly the gravamen of Edison's concern. 
The Proposed Final Judgment, in contrast, gives this emerging electric 
market more protection than Edison's suggested remedies through prior 
notice and market monitoring provisions.\8\
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    \8\ For example, Edison argues that the FTC's consent decree in 
PacificCorp (PacifiCorp/The EnergyGroup, FTC File No. 9710091) 
provides a superior remedy. It mischaracterizes the FTC decree as 
equivalent to the divestiture of Pacific's gas pipeline assets that 
constitute virtually all of the assets Pacific contributed to the 
merger with Enova. Unlike this case, however, the divesture of coal 
assets in PacifiCorp was not the equivalent of rescission of the 
merger. PacifiCorp is a large integrated electric utility with coal 
holdings in the western United States. It was acquiring the Energy 
Group, an international electric company, the second largest 
electric distribution company in the United Kingdom, which also held 
coal reserves in both eastern and western United States. The FTC 
decree did not requirement the Energy Group to divest its coal 
business, much less its primary utility business, as Edison would 
have the decree in the instant case require divestiture of Pacific's 
utility pipeline business. Instead, the FTC decree required a 
specific subset of the Energy Group's western coal mines to be 
divested. The FTC's PacifiCorp decree stopped with divesture of 
those specific assets and, unlike the Final Judgment proposed here, 
did not go further to limit the merged company's reacquisition of 
assets that would create the same vertical problem as the divested 
assets.
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    In the end, Edison's preference for a different remedy is not 
relevant to the Court's inquiry. Under the Tunney Act, the Court may 
not choose or fashion a remedy that is ``better'' in someone's opinion 
than the one negotiated and agreed to by the parties. To the contrary, 
``a proposed decree must be approved even if it falls short of the 
remedy the court would impose on its own, as long as it falls within 
the range of acceptability or is `within the reaches of the public 
interest.' '' \9\ The proposed Final Judgment meets and exceeds this 
legal standard.
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    \9\ United States v. American Tel. & Tel. Co., 552 F. Supp. 131, 
153 n.95 (D.D.C. 1982), aff'd sub nom. Maryland v. United States, 
460 U.S. 1001 (1983)(mem.).
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B. City of Vernon's Comments
    The City of Vernon recognizes in its comments that the Proposed 
Final Judgment focuses entirely on the potential of PE/Enova to reduce 
competition in the electricity market in Southern California. It 
comments that the proposed judgment ``ignores'' the effect of the 
merger on the natural gas transmission market in Southern California. 
The case brought by the Department, however, involved the electricity 
market in Southern California, and the relief addressed in the Proposed 
Final Judgment remedies the competitive harm posed by the proposed 
acquisition to that market. The Complaint does not allege violations in 
the natural gas transmission market, and the City of Vernon's proposed 
relief is thus not relevant to this proceeding.

III. The Legal Standard Governing the Court's Public Interest 
Determination

    Once the United States moves for entry of the proposed Final 
Judgment, the Tunney Act directs the Court to determine whether entry 
of the proposed Final Judgment ``is in the public interest.'' 15 U.S.C. 
Sec. 16(e). In making that determination, ``the court's function is not 
to determine whether the resulting array of rights and liabilities is 
one that will best serve society, but only to confirm that the 
resulting settlement is within the reaches of the public interest.'' 
United States v. Western Elec. Co., 993 F.2d 1572, 1576 (D.C. Cir.) 
(emphasis added, internal quotation and citation omitted), cert. 
denied, 114 S. Ct. 487 (1993).
    The Court is not ``to make de novo determination of facts and 
issues.'' Western Elec., 993 F.2d at 1577. Rather, ``[t]he balancing of 
competing social and political interests affected by a proposed 
antitrust decree must be left, in the first instance, to the discretion 
of the Attorney General.'' Id. (internal quotation and citation 
omitted). In particular, the Court must defer to the Department's 
assessment of likely competitive consequences, which it may reject 
``only if it has exceptional confidence that adverse antitrust 
consequences will result--perhaps akin to the confidence that would 
justify a court in overturning the predictive judgments of an 
administrative agency.'' Id. \10\ The Court may reject a decree simply 
``because a third party claims it could be better treated,'' United 
States v. Microsoft, 56 F.3d 1448, 1459 (D.C. Cir. 1995), or based on 
the belief that ``other remedies were preferable,'' id. at 1460.
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    \10\ The Tunney Act does not give a court authority to impose 
different terms on the parties. See e.g., American Tel. & Tel., 552 
F. Supp. at 153 n. 95; accord H.R. Rep. No. 93-1463, at 8 (1974). A 
court, of course, can condition entry of a decree on the parties' 
agreement to a different bargain, see e.g., American Tel. & Tel., 
552 F. Supp. at 225, but if the parties do not agree to such terms, 
the court's only choices are to enter the decree the parties 
proposed or to leave the parties to litigate.
    United States v. Thomson Corp., 949 F. Supp. 907 (D.D.C. 1996), 
cited by Edison (Edison Comments at 9-10), does not support Edison's 
argument to reject the Proposed Final Judgment. That case involved 
the Tunney Act review of a proposed final judgment that required one 
of the merging companies to license a copyright that it claimed but 
had not licensed prior to the merger. While there was some 
controversy as to whether the decree's license provisions could have 
been extracted as the result of a trial, see Thomson, 949 F. Supp. 
at 927, the Court nevertheless considered comments on the specific 
terms of the license proposal because of the potential 
anticompetitive harm that could result from ``the merger of these 
two publishing giants in conjunction with'' the asserted copyright 
claim. Id. at 928. The Thomson Court addressed comments on the 
license provision on that ground, and not because the decree would 
remedy preexisting wrongs; nor did the court add or alter any 
provisions to the Final Judgment that had not been agreed to by the 
parties. Here, in contrast, Edison is not commenting on a specific 
remedy agreed to by the parties as a means of addressing the harms 
related to a merger. Instead, Edison is asking this Court to insert 
an entirely new mechanism for relief into the decree, in order to 
address Pacific's preexisting pipeline market power as it could be 
exercised in relation to the acquisition of any electricity assets, 
regardless of Pacific's merger with Enova. Edison's proposed 
approach is completely at odds with Judge Friedman's actions in the 
Thomson case. Judge Friedman, as Edison concedes, was careful not to 
substitute his judgment for the government's and, further, did not 
adopt proposed remedies that were unrelated to the merger. (See 
Edison Comments at 10).
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    Further, the Tunney Act does not contemplate judicial reevaluation 
of the wisdom of the government's determination of which violations to 
allege in the Complaint. The government's decision not to bring a 
particular case on the facts and law before it, like any other decision 
not to prosecute, ``involves a complicated balancing of a number of 
factors which are peculiarly within [the government's expertise.'' 
Heckler v. Chaney, 470 U.S. 821, 831 (1985). Thus, the Court may

[[Page 3555]]

not look beyond the Complaint ``to evaluate claims that the government 
did not make and to inquire as to why they were not made.'' Microsoft, 
56 F.3d at 1459; see also United States v. Associated Milk Producers, 
Inc.. 534 F.2d 113, 117-18 (8th Cir. 1976).
    The government has wide discretion within the reaches of the public 
interest to resolve potential litigation. See e.g., Western Elec. Co., 
993 F.2d 1572; American Tel & Tel., 552 F. Supp. at 151. The Supreme 
Court has recognized that a government antitrust consent decree is a 
contract between the parties to settle their disputes and differences, 
United States v. ITT Continental Baking Co.. 420 U.S. 223, 235-38 
(1975); United States v. Armour & Co., 402 U.S. 673, 681-82 (1971), and 
``normally embodies a compromise; in exchange for the saving of cost 
and elimination of risk, the parties each give up something they might 
have won had they proceeded with the litigation.'' Armour, 402 U.S. at 
681. As Judge Greene has observed:

    If courts acting under the Tunney Act disapproved proposed 
consent decrees merely because they did not contain the exact relief 
which the court would have imposed after a finding of liability, 
defendants would have no incentive to consent to judgment and this 
element of compromise would be destroyed. The consent decree would 
thus as a practical matter be eliminated as an antitrust enforcement 
tool, despite Congress' directive that it be preserved.

American Tel. & Tel., 552 F. Supp. at 151. This Judgment has the virtue 
of bringing the public certain benefits and protection without the 
uncertainty and expense of protracted litigation. See Armour, 402 U.S. 
at 681; Microsoft, 56 F. 3d at 1459.
    Finally, the entry of a governmental antitrust decree forecloses no 
private party from seeking and obtaining appropriate antitrust 
remedies. Defendants will remain liable for any illegal acts, and any 
private party may challenge such conduct if and when appropriate.

IV. Conclusion

    After careful consideration of the public comments, the United 
States concludes that entry of the proposed Final Judgment will provide 
an effective and appropriate remedy for the antitrust violation alleged 
in the Complaint and is in the public interest. The United States will 
therefore ask the Court to enter the proposed Final Judgment after the 
public comments and this Response have been published in the Federal 
Register, as 15 U.S.C. 16(d) requires.

    Dated: January 11, 1999.

        Respectfully submitted,
Jade Alice Eaton
D.C. Bar #939629, Trial Attorney, U.S. Department of Justice, Antitrust 
Division, 325 Seventh Street, N.W., Washington, DC 20530. Phone: (202) 
307-6316.

Certificate of Service

    I hereby certify that I have caused a copy of the foregoing 
Plaintiff's Response to Public Comments, as well as attached copies of 
the public comments received from the City of Vernon, California, and 
from Southern California Edison Company, to be served on counsel for 
defendant and for public commentators in this matter in the manner set 
forth below:

    By first class mail, postage prepaid:
Steven C. Sunshine,
Shearman & Sterling, 801 Pennsylvania Avenue, N.W., Washington, DC 
2004.
John W. Jimison,
Brady & Berliner, 1225 Nineteenth Street, N.W., Suite 800, Washington, 
DC.
J.A. Bouknight, Jr.,
David R. Roll,
James B. Moorhead,
Steptoe & Johnson LLP, 1330 Connecticut Ave., N.W., Washington, DC 
20036.

    Dated: January 11, 1999.
Jade Alice Eaton,
D.C. Bar # 939629. Antitrust Division, U.S. Department of Justice, 325 
Seventh Street, N.W., Suite 500, Washington, DC 20530, (202) 307-6456, 
(202) 616-2441 (Fax).

Brady & Berliner

1225 Nineteenth Street. N.W., Suite 800, Washington, DC 20036

August 17, 1998.
Mr. Roger W. Fones,
Chief Transportation Energy & Agriculture Section Antitrust 
Division, U.S. Department of Justice, 325 Seventh Street, N.W., 
Suite 500, Washington, DC 20530.

Re: Comments of the City of Vernon, California, on the Proposed 
Final Judgement, Stipulation in the Competitive Impact Statement in 
U.S. v. Enova Corporation, Civil No. 98-CV-583

    Dear Mr. Fones: Pursuant to the legal notice issued by the 
Antitrust Division on June 18, 1998 the City of Vernon, California, 
(``Vernon'') hereby provides these comments in opposition to the 
approval of the Proposed Final Judgement Stipulation in the 
Competitive Impact Statement in U.S. v. Enova Corporation, Civil No. 
98-CV-583 (``Proposed Judgement'').
    Vernon submits that the Proposed Judgement would permit a merger 
to be consummated that will alter and damage the potential for 
competition in the California natural gas market. The Proposed 
Judgement focuses entirely on the potential of the merged entity to 
reduce competition in the electricity market in southern California, 
and orders as a remedy the divestiture of certain electricity 
generating stations owned by the San Diego Gas & Electric Company 
(``SDG&E''). The Proposed Judgement ignores the fact that the merger 
will combine the two largest natural gad transmission and 
distribution companies in southern California. The merger will thus 
eliminate the potential for competition between them, or for support 
by either of them for new natural gas transmission pipeline which 
would compete with the other.
    Vernon operates a municipal electricity utility including its 
own gas-fired power plant and will complete this year a municipal 
natural gas utility. Vernon and other natural gas distributing 
entities in southern California have lacked any meaningful 
alternative to the monopoly natural gas transmission service from 
the Southern California Gas Company (``SoCalGas''), the parent of 
which, Pacific Enterprises, is merging with Enova. Although two 
interstate pipelines were built into California in the first years 
of this decade, their systems terminate in the Bakersfield, 
California, region and do not compete with SoCalGas in its service 
territory in the large Los Angeles metropolitan region, including 
Vernon.
    In order for a competing pipeline to be constructed into Los 
Angeles, the sponsor must overcome significant hurdles and expenses 
of locating and obtaining an environmentally suitable right-of-way, 
and must have agreements with shippers for an adequate volume of 
natural gas to support the expensive project. Having large 
prospective shippers under contract to use a new pipeline is a 
prerequisite to constructing one. Despite these obstacles, there 
have been a number of potential pipelines discussed and considered 
that would have competed with SoCalGas' gas transmission service 
into the Los Angeles area. However, to date, SoCalGas' actions to 
frustrate and oppose any such competition have been successful. 
These efforts have included special discounted contracts offered to 
the most likely customers of a new pipeline and adopting a penalty 
tariff that effectively forbids any customer of a new pipeline from 
taking any service at all from SoCalGas--even at different 
locations--without paying the full SoCalGas system tariff for 
transmission in addition to the cost of the competing pipeline.
    The single largest potential ``anchor'' customer of a new 
pipeline to compete with SoCalGas was SDG&E. The merger that would 
be approved by the Proposed Judgement would eliminate SDG&E's 
potential role as an anchor shipper on a new pipeline, and cement a 
permanent alliance between SDG&E and SoCalGas to sustain their joint 
monopoly on gas transmission services in southern California.
    While the divestiture of SDG&E's power plant may have reduced 
the potential that the merged entity would use that monopoly to 
favor its own gas-fired generators in a competitive electricity 
market, that limited divestiture does nothing to reduce the damage 
to competition created by this merger in the natural gas market.
    Across the United States, competition among natural gas 
transportation companies has benefitted consumers with improved

[[Page 3556]]

service at lower tariffs. With the exception of those customers in 
the Bakersfield area, and those selectively receiving discounts to 
ensure they will not support competing pipelines, the customers in 
southern California have not had any benefits of competition among 
gas transmission providers. The approval of the Proposed Judgement 
and consummation of the merger it approves will reduce their chances 
of such benefits.
    Vernon submits that approval of the merger should have been 
conditioned not only on actions to reduce the potential risks to 
competition in the electricity market, but also to reduce the injury 
to competition in the natural gas market. Such action could have 
included a requirement that SoCalGas sell to independent entities a 
volume of transportation capacity equivalent to that which it had 
traditionally used to serve SDG&E, or a requirement that SoCalGas 
offer transportation rights on its system which can be released and 
brokered to others, creating the potential for a competitive third-
party market among gas shippers with defined rights. No such action 
was taken in the Proposed Judgement.

    For this reason, Vernon opposes the approval of the Proposed 
Judgement.

        Respectfully submitted,
John W. Jimison, Esq.,
Attorney for The City of Vernon.

Comments of Amicus Curiae Southern California Edison Company on the 
Proposed Final Judgment

Kevin J. Lipson,
Mary Anne Mason,
Hogan & Hartson LLP, Columbia Square, 555-Thirteenth Street, NW, 
Washington, DC 20004-1109, (202) 637-5600.
Stephen E. Pickett,
Douglas Kent Porter, Southern California Edison Company, P.O. Box 800, 
2244 Walnut Grove Avenue, Rosemead, California 91770, (626) 302-1903.
J.A. Bouknight, Jr.,
David R. Roll,
Steptoe & Johnson LLP, 1330 Connecticut Avenue, NW, Washington, DC 
20036, (202) 429-3000.

    Dated: August 17, 1998.

Comments of Amicus Curiae Southern California Edison Company on the 
Proposed Final Judgment

    Southern California Edison Company (``SCE'') respectfully submits 
the following comments on the proposed Final Judgment in the above 
referenced matter.\1\
---------------------------------------------------------------------------

    \1\ As a part of these Comments, SCE is attaching the Affidavit 
of Paul R. Carpenter, an economist who has extensive experience in 
analyzing energy markets.
---------------------------------------------------------------------------

Introduction and Summary

    This is a case about an electric utility. Like any company in our 
capitalistic system, this utility would like to raise its prices in 
order to increase profits for its shareholders. Finding that 
competition constrains its ability to increase electricity prices, the 
utility decides to buy the only company in the world that will give it 
that ability to raise electricity prices in the area where the utility 
competes. Not surprisingly, the Department of Justice (``DOJ'') finds 
the merge to be an obvious violation of the antitrust laws. DOJ then 
files a complaint and proposes a Final Judgment that permits the merger 
without eliminating the competitive problem identified in the 
complaint.
    The violation alleged in DOJ's complaint is straight-forward. Enova 
Corporation (``Enova''), the owner of one of California's three major 
electric utilities, has acquired Pacific Enterprises (``Pacific''), 
which owns and operates the intrastate gas pipeline system that 
provides virtually all of the natural gas consumed in southern 
California. As DOJ's complaint alleges, control of this pipeline system 
will provide Enova with monopoly control of natural gas in the southern 
California market. This in turn will permit Enova to control the price 
of electricity in southern California much of the time, because natural 
gas is used to generate electricity ``on the margin'' during most hours 
of the year in southern California.
    In competitive markets, the cost characteristics of a producer on 
the margin are likely to set the market-clearing price. In southern 
California, as of April 1, 1998, this is necessarily true, because 
California has created a power exchange (``PX'')--the first such market 
in the United States--in which generators of electric power bids for 
each hour and all successful bidders are paid a price determined by the 
highest bid that is accepted. Thus, where gas-fueled generation is on 
the margin, as it is most of the time, an increase in the price of 
natural gas leads directly to an increase in the price for every 
kilowatt hour of electricity consumed in southern California.
    Prior to the merger, Enova had every incentive to raise electricity 
prices but it lacked the ability to do so because it has no control 
over natural gas prices. On the other hand, before the merger, Pacific 
had the ability to control natural gas prices but had not succeeded in 
entering the electricity marketing business.\2\ Thus, Enova has the 
incentive but not the ability to manipulate electricity prices; Pacific 
had the ability but lacked the incentive.
---------------------------------------------------------------------------

    \2\ Before the merger, Pacific had established a subsidiary for 
gas and electricity marketing and tried to enter the electricity 
marketing business. However, as Enova explained to the Federal 
Energy Regulatory Commission (``FERC''), this subsidiary had not 
succeeded in securing any contracts to sell electricity at the time 
of the proposed merger. See Ensource, 78 FERC para. 61,064, at 
61.231 (1997) (``Since Ensource never has engaged in marketing 
activity* * *'').
---------------------------------------------------------------------------

    DOJ correctly concluded that a merger of these two firms, which 
combines the ability and incentive to raise electricity prices in the 
southern California market, violates the antitrust laws. In the face of 
this violation, what is the remedy? The most obvious remedy, of course, 
is to stop the merger from happening. Short of that, the next most 
effective and logical remedy is to remove the source of the merged 
firm's monopoly power, either by requiring divestiture of the natural 
gas pipeline system or by creating an independent system operator 
(``ISO'') to operate that system. The last but least attractive option 
is to try to lessen the merged firm's incentive to exercise its 
monopoly power in order to profit from higher electricity prices. This 
is the least attractive option because curbing incentives to profit 
from higher electricity prices requires a complex latticework of 
provisions designed to prevent the merged firm from retaining and 
acquiring contractual rights and other types of economic interests in 
electric power. Such a remedy is difficult to write and even harder to 
administer.
    Rather than stopping the merger in its tracks or adopting a 
structural remedy to remove the source of the monopoly power. DOJ asks 
this Court to approve a remedy that will have little or no impact on 
the merged company's incentive to raise electricity prices. The 
proposed Final Judgment should be rejected because the merged entity 
still has the unfettered ability to enter into a variety of electric 
power transactions, which will enable it to profit from higher 
electricity prices. Specifically:

     While the proposed Final Judgment requires Enova to 
divest two of its gas-fueled electric generating plants, totaling 
some 1650 megawatts, it allows the merged company to acquire an 
unlimited amount of generating facilities built after January 1, 
1998, or any repowered/rebuilt facilities, whatever the fuel-type. 
Thus, the 1650 MW divestiture requirement can be undone with a 
single purchase of a large new facility.
     There is no prohibition on the merged company 
contracting, the day after divestiture, to purchase the electrical 
output of those same divested generating facilities (or other 
facilities).
     The proposed Final Judgment explicitly permits the 
merged firm to enter into ``tolling'' arrangements by which it can 
in essence rent electric generating plants to convert gas into 
electricity.
     There is no prohibition on the merged company entering 
into financial contracts (derivatives such as options and futures) 
that

[[Page 3557]]

would enable it to prohibit from changes in southern California 
electricity prices.

    Under the proposed decree, the merged firm can acquire both new and 
repowered/rebuilt electric generation assets. It can acquire by 
contract the economic attributes of ownership of electric generation. 
It can rent generating units to produce electric power. And it can 
trade in electricity financial contracts for the southern California 
market. If it can do all this, then it obviously can benefit from 
increases in the price of electricity just as it could if it still 
owned the divested electric generating facilities. Consequently, the 
proposed Final Judgment does not eliminate the merged firm's incentive 
to exercise market power in order to increase electricity prices. And 
it does not even purport to address market power. Therefore, the 
proposed Final Judgment does not even come close to solving the 
fundamental competitive problem articulated in DOJ's complaint.
    One rationale that DOJ has put forward for having accepted the 
ineffective remedial measures in the proposed Final Judgment is that 
more effective remedies would involve relief that extends beyond the 
effect of the merger, as Pacific could theoretically have engaged in 
theses activities without a merger. But this is an unlawful merger. 
Without the acquisition, Enova's incentive to raise electricity prices 
is not backed by any ability to do so. The merger dramatically and 
unlawfully changes the landscape by immediately coupling Enova's 
incentive and electricity-expertise with Pacific's natural gas muscle. 
The argument that a substantial link between the gas pipeline system 
and electricity markets could easily have been established without the 
merger ignores the fact that this merger creates that substantial link.
    If, for whatever reason, DOJ prefers not to stop the merger and not 
to address the upstream source of the market power, but instead chooses 
to focus on the incentives to exercise its market power in the 
downstream electricity market, then the public interest requires that 
it craft remedies designed to curb the incentives that are sufficiently 
effective to cure the antitrust violation. Because DOJ failed in that 
task, this Court is faced with a proposed Final Judgment that falls far 
short of being within the reaches of the public interest.\3\
---------------------------------------------------------------------------

    \3\ As a diversionary tactic, Enova can be expected to urge the 
Court to disregard SCE's comments, no matter how persuasive they may 
otherwise be, because SCE is merely a self-interested competitor of 
the merged firm. While it is true that SCE is a competitor for 
electricity sales, SCE's principal interest in this matter is at the 
largest purchaser of electricity in the southern California market, 
one that will be directly and significantly harmed by electricity 
price increases resulting from this merger. Under the California 
restructuring legislation, the legislature ``froze'' electricity 
rates at levels in effect as of June 1996. See Cal. Pub. Util. Code 
Sec. 368(a). During the rate freeze period which will end December 
31, 2001, SCE must purchase all the energy that it sells to its 
utility service customers from the PX. SCE's rates include separate 
components for transmission, distribution, etc. The sum of these 
separate components is less than the frozen rate levels, with that 
residual difference being used by SCE to recover costs associated 
with generation-related assets that would not otherwise be recouped 
if cost recovery were determined solely by selling energy purchased 
from these assets at the prevailing market price. As a consequence, 
SCE's shareholders are at risk and will be directly harmed if PX 
electricity prices rise to a level that would cause SCE's costs to 
exceed the frozen rate levels.
---------------------------------------------------------------------------

    In summary, SCE urges that the proposed Final Judgment be rejected. 
If DOJ nevertheless concludes that a salvage effort is appropriate, DOJ 
and Enova can be sent back to the bargaining table to produce a Final 
Judgment that remedies the competitive problem described in the 
complaint. Such remedies would include one of the following:
    (1) Rescission of the merger;
    (2) Divestiture of the gas pipeline system or, alternatively, 
establishment of an independent system operator to operate it 
independently of the merged company; or
    (3) Adoption of measures that will eliminate the merged company's 
incentive to participate directly, and indirectly through financial 
instruments, in the southern California electricity market in any 
manner that would allow it to profit from increased electricity prices.

Argument

I. The Tunney Act Standard of Review Requires This Court To Determine 
Whether the Proposed Final Judgment Is in the Public Interest

    On March 9, 1998, the Antitrust Division of DOJ filed a complaint 
against Enova alleging that the merger of Enova and Pacific will 
violate Section 7 of the Clayton Act. Along with the complaint, DOJ 
filed a Stipulation and Order pursuant to which the parties consented 
to entry of a proposed Final Judgment and Enova agreed to abide by its 
terms pending its entry by the court.
    The filing of the proposed Final Judgment triggered a proceeding 
under the Antitrust Procedures and Penalties Act, commonly known as the 
Tunney Act.\4\ The purpose of the Tunney Act is to provide notice to 
the public, an opportunity to comment, and judicial scrutiny of consent 
decrees in antitrust cases to determine whether they are in the 
``public interest.'' The Tunney Act requires DOJ to publish the 
proposed Final Judgment and to file and publish a competitive impact 
statement (``CIS'') explaining the case, the anti-competitive conduct 
involved, the proposed remedy, and any alternative remedies considered 
by it. DOJ must also furnish to the Court any comments that it receives 
from the public during a 60-day period commencing with the noticing of 
the CIS, its response to these comments, and any documents it 
``considered determinative in formulating'' the decree.
---------------------------------------------------------------------------

    \4\ 15 U.S.C. Sec. 16(b)-(h).
---------------------------------------------------------------------------

    Before a court may approve a proposed Final Judgment, the Tunney 
Act requires the court to ``determine that the entry of such judgment 
is in the public interest''.\5\ The Act provides that in making its 
public interest determination, the court may consider:
---------------------------------------------------------------------------

    \5\ 15 U.S.C. Sec. 16(e).

    (1) the competitive impact of such judgment, including 
termination of alleged violations, provisions for enforcement and 
modification, duration or relief sought, anticipated effects of 
alternative remedies actually considered, and any other 
considerations bearing upon the adequacy of such judgment;
    (2) the impact of entry of such judgment upon the pubic 
generally and individuals alleging specific injury from the 
violations set forth in the complaint including consideration of the 
public benefit, if any, to be derived from a determination of the 
issues at trial.\6\
---------------------------------------------------------------------------

    \6\ Id.

    The scope of Tunney Act review was articulated in a 1995 decision 
of the Court of Appeals for the D.C. Circuit in Microsoft.\7\ In that 
case, District Judge Sporkin had declined to enter a proposed consent 
decree settling an action by DOJ alleging monopolization and various 
exclusionary practices. Although the Court of Appeals reversed and 
ordered entry of the proposed decree without revision, it set forth 
certain guidelines, among others, that are relevant to the Court's 
public interest determination in this case:
---------------------------------------------------------------------------

    \7\ United States v. Microsoft, 56 F.3d 1448 (D.C. Cir. 1995).

     ``[T]he court's function is not to determine whether 
the resulting array of rights and liabilities is the one that will 
best serve society, but only to confirm that the resulting 
settlement is within the reaches of the public interest.'' \8\
---------------------------------------------------------------------------

    \8\ Id. at 1460 (emphasis in original, internal citations and 
quotation marks omitted).

     ``[I]f third parties contend that they would be 
positively injured by the decree, a district judge might well 
hesitate before assuming that the decree is appropriate.'' \9\
---------------------------------------------------------------------------

    \9\ Id. at 1462.


[[Page 3558]]


---------------------------------------------------------------------------

     ``A district judge * * * would and should pay special 
attention to the decree's clarity [and may] insist on that degree of 
precision concerning the resolution of known issues as to make this 
task, in resolving subsequent disputes, reasonably manageable * * * 
. If the decree is ambiguous, or the district judge can foresee 
difficulties in implementation, we would expect the court to insist 
that these matters be attended to.'' \10\
---------------------------------------------------------------------------

    \10\ Id. at 1461-62.

    Under Microsoft, it is now clear that a court may not reject a 
remedy simply because it is not the ``best'' remedy that could have 
been selected. On the other hand, it is equally clear under Microsoft 
that a court has discretion to reject a negotiated remedy which is 
ineffective because it does not seek to address and resolve the core 
competitive problem identified in DOJ's complaint.
    Following Microsoft, courts have continued to scrutinize proposed 
consent decrees to determine whether they effectively address and 
resolve the fundamental competitive problems articulated by DOJ. For 
instance, in Thomson, District Judge Friedman examined concerns about 
several aspects of a proposed consent decree as expressed in briefs 
submitted amicus curiae by two competitors of the merging parties, in 
public comments submitted to DOJ, and at an extended public 
hearing.\11\ Judge Friedman carefully examined arguments concerning 
each of the four separate areas of concern, noting proposed 
supplemental commitments \12\ and modifications to the initially filed 
proposed consent decree to resolve some of these concerns.\13\ He was 
careful not to substitute his own judgment for DOJ's as to what could 
be the best remedy \14\ and he declined to suggest relief for conduct 
unrelated to the merger.\15\ Nonetheless, Judge Friedman refused to 
enter even the revised decree, because neither the original nor the 
proposed revision resolved substantial concerns that the decree would 
maintain, by court order, a dubious copyright claim that DOJ's 
complaint and commentators had identified as a substantial barrier for 
new competitors seeking to enter the relevant market.\16\ Only after 
the parties submitted a further amendment addressing these concerns did 
Judge Friedman order entry of the consent decree.\17\
---------------------------------------------------------------------------

    \11\ United States v. The Thomson Corp., 949 F. Supp. 907, 909, 
912 (D.D.C. 1996), aff'd per curiam 1998 U.S. App. LEXIS 12921 (May 
29, 1998).
    \12\ See, e.g., id. at 916 (noting that ``Thomson confirmed in 
writing that it will continue'' a practice that commentators and 
amicus curiae thought might cease after the merger).
    \13\ See, e.g., id. at 916 (noting adoption of new consent 
decree provision barring Thomson from taking certain actions to 
undermine viability of products to be divested under the decree); 
id. at 924 (noting proposal to add language to proposed decree to 
ensure that licenses to one of the products to be divested may be 
sublicensed); id. at 925 (noting further change to proposed consent 
decree after Tunney Act hearing to ensure that divestiture will not 
affect pre-existing rights under a particular contract). See also 
id. at 926 nn. 19-20 (noting changes to initial proposed decree in 
response to concerns expressed in comments and at the hearing).
    \14\ See id. at 919.
    \15\ See, e.g., id. at 920 (refusing to consider requests to 
reopen bidding on past contracts, because not related to competition 
among the parties to the merger).
    \16\ See id. at 927-930 (discussing complaint's allegations and 
decree's proposed remedy regarding copyright claim).
    \17\ See United States v. The Thomson Corp., 1997-1 Trade Cas. 
(CCH) para. 71,735, 1997 U.S. Dist. LEXIS 1893 (Feb. 27, 1997).
---------------------------------------------------------------------------

II. The Proposed Final Judgment is Not in the Public Interest

    Under standards laid down in Microsoft and implemented in Thomson, 
the proposed Final Judgment is not within the ``reaches of the public 
interest'' because it does not remedy the core competitive problem 
identified in DOJ's complaint--namely, that the merged entity will have 
the ability and incentive to increase electricity prices. Unless and 
until DOJ and Enova agree to a remedy which addresses and resolves this 
problem, the Court must reject the proposed decree.
A. The Complaint Correctly Identifies the Root of the Competitive 
Problem: Pacific's Control of Natural Gas Transportation and Storage in 
California
    As a result of its monopoly over intrastate transmission and 
storage of natural gas, Pacific (via its subsidiary, SoCal Gas), has 
the power and ability to increase the price of natural gas to gas-fired 
electric generators which in turn will increase the price of 
electricity in California. In its complaint, DOJ found that, 
notwithstanding regulatory oversight, Pacific has the ability to use 
its control over those assets to manipulate the price of gas to 
consumers, including gas-fueled electric generators:

     Pacific has ``a monopoly of transportation of natural 
gas within southern California [and] a monopoly of all natural gas 
storage services throughout California.'' \1\\8\
---------------------------------------------------------------------------

    \1\\8\ Complaint para.15.96 percent of gas-fueled generators in 
southern California buy gas transportation services from Pacific. 
Proposed Final Judgment and Competitive Impact Statement; United 
States v. Enova Corp. (``CIS''), 63 FR 33393, at 33403 (June 18, 
1998).
---------------------------------------------------------------------------

     ``[A]lthough regulated by the California Public 
Utilities Commission (`CPUC'), Pacific has the ability to restrict 
the availability of gas transportation and storage to consumers, by 
limiting their supply or cutting them off entirely, which has the 
effect of raising the price they pay for natural gas.'' \19\
---------------------------------------------------------------------------

    \19\ Complaint para.16; see also Complaint para.20.

    The attached Affidavit of Dr. Paul Carpenter describes the numerous 
means by which Pacific (via SoCalGas) can exercise its monopoly power, 
as charged by DOJ, to restrict the availability of gas transportation 
and gas storage capacity in southern California. These means include 
SoCalGas' ability to (a) control and deny access to its intrastate 
transmission and storage assets, (b) manipulate the price of intrastate 
services, such as short-term balancing or emergency supply services, 
(c) withhold the quantity of interstate capacity it makes available in 
secondary markets in order to raise price, (d) determine the volume of 
flowing supplies on a day-to-day basis through its core-related storage 
injection and withdrawal decisions, and (e) manipulate prices and 
access through its possession of valuable operational 
information.\2\\0\
---------------------------------------------------------------------------

    \2\\0\ Aff. at para.8.
---------------------------------------------------------------------------

    The ability of Pacific to restrict the availability of gas 
transportation and storage to consumers, including gas-fueled 
generators, is the key to its power to increase electricity prices in 
southern California for two related reasons. First, as explained by 
DOJ, most electricity generated in California is bought and sold 
through the California PX, which is a computerized bidding system that 
matches electricity supply and demand every hour.\21\ The price of 
electricity for all units sold is determined by the most expensive unit 
sold in that hour, regardless of the cost or bidding price of less 
expensive units.\22\ Stated differently, all sellers receive the PX's 
marginal price, regardless of their bid, and all buyers pay the 
marginal price.\23\
---------------------------------------------------------------------------

    \21\ CIS at 33403. The CIS states that the matches occur every 
half-hour; in fact, the matches are hourly.
    \22\ CIS at 33403.
    \23\ Aff. at para.9. This is true with one exception involving 
nuclear-powered generators, which are covered by a different pricing 
scheme.

    Second, ``gas-fired plants are in general the most costly to 
operate.'' \24\ In other words, gas-fueled plants are usually on the 
margin. Because of the California PX, an increase in the price of 
natural gas to these gas-fired plants will translate in an increase in 
the price of all electricity sold in California through the PX. DOJ 
made this point in its CIS as follows:
---------------------------------------------------------------------------

    \24\ CIS at 33403.

    [d]uring these periods [of high electricity demand], the gas-
fired plants, as the most costly to operate and thus the highest 
bidders

[[Page 3559]]

into the [PX], are able to set the price for all electricity sold 
through the [PX].\25\
---------------------------------------------------------------------------

    \25\ Id. DOJ is certainly correct in this critical finding. 
Attachment B to Dr. Carpenter's affidavit depicts the electricity 
supply curve for all generating resources in the western United 
States. As shown, actual demand for electricity (which varies by 
time of day and by season) falls within a certain band (70,500 
megawatts to 93,500 megawatts) about two-thirds of the time. Within 
that band, 90 percent of the megawatts that can be generated come 
from gas-fired generators. And, 69 percent of those megawatts come 
from California gas-fired generators. Aff. at Attach. B.
---------------------------------------------------------------------------

    In short, what this all means is that as a consequence of its 
monopoly over gas transportation and storage, Pacific has the 
unquestioned ability to directly and materially affect the price of 
electricity in southern California. As summarized by DOJ:

    By virtue of its monopoly over natural gas transportation and 
storage, Pacific currently has the ability to increase the price of 
electricity, when during high demand periods, electricity from 
California gas-fired generators is needed to supplement less costly 
electricity. Pacific can restrict gas-fired generators' access to 
gas, which has the effect of raising the cost of gas-filed 
generators in general. Alternatively, Pacific can cut off or impede 
the more efficient gas generators' access to gas, leaving the 
higher-cost generators to meet consumer demand for electricity. In 
either case, Pacific is able to increase the cost of electricity 
from gas-fired plants, thereby increasing the prices they bid into 
the [PX] and ultimately the price of electricity sold through the 
[PX].\26\

    \26\ CIS at 33404 (emphasis added).
---------------------------------------------------------------------------

    To be sure, Pacific's ability to increase electricity prices 
existed absent the merger. Without the merger, however, Pacific had no 
incentive to use its market power because it was not in the electricity 
business, and it had no economic interest in electricity sales.\27\ It 
is surely no coincidence that Enova--one of California's ``big three'' 
electric utilities and one which every incentive to raise electricity 
prices--sought out Pacific, the one company in the world that could 
raise prices in the soon-to-be deregulated California electricity 
market (the PX). It is also no coincidence that the timing of the 
merger was to coincide almost precisely with the commencement of 
operation of that deregulated market.
---------------------------------------------------------------------------

    \27\ A Pacific affiliate did have paper authority from the 
FERC--the federal overseer of wholesale electricity sales--to make 
electricity sales but it never made any such sales and, in fact, 
voluntarily terminated its marketing certificate once the Enova-
Pacific merger was announced. See Ensource, 78 FERC para. 61,064 
(1997).
---------------------------------------------------------------------------

    To take the position, as apparently DOJ does, that Pacific's 
ability to raise gas prices and hence, electricity prices is not merger 
related, and therefore should not be subject to any merger-related 
remedy is to ignore reality. But for this merger, Enova would not be 
able to affect electricity prices. It is the merger that transforms 
Pacific's previously benign ability to affect electricity prices into a 
serious, immediate threat to stifle competition in a nascent but 
vitally important market.
B. The Competitive Problem Attendant to This Merger Calls for a 
Structural Remedy Directed at the Natural Gas Transportation and 
Storage Assets
    Having identified the source of the competitive problem, and having 
concluded that the merger was unlawful, DOJ then had to fashion an 
appropriate remedy. Logic, traditional antitrust policy and precedent, 
and one of the very terms of the proposed Final Judgment, all point to 
a structural remedy aimed directly at the source of the market power--
Pacific's natural gas transportation and storage assets.\28\ Such a 
remedy would separate Pacific's gas transportation and storage assets 
from the merged company's other assets, either by divestiture or by 
creation of an ISO to operate those assets. But, for unexplained 
reasons, the proposed Final Judgment does no such thing; indeed, this 
remedy apparently was not even seriously considered. In a section of 
the CIS entitled ``Alternatives to the Proposed Final Judgment'', the 
only alternative DOJ stated that it considered was a full trial on the 
merits.\29\ The remedies that the DOJ did adopt are all aimed at 
curtailing the incentive of the merged company to carry out it proven 
ability to manipulate gas and, hence, electricity prices. The 
ineffectiveness of these remedies is discussed in the following 
section.
---------------------------------------------------------------------------

    \28\ Of course the most obvious and most effective remedy--
preventing this unlawful merger from being consummated--was 
apparently rejected by DOJ. No explanation was given for eschewing 
this proven, simple method of remedying the effects of this unlawful 
merger.
    \29\ See CIS at 33407.

    Ironically, a provision in the proposed Final Judgment itself makes 
clear that the only completely effective remedy is a structural remedy 
aimed at the source of the market power; the same provision undermines 
the effectiveness of the remedies actually proposed by DOJ and Enova, 
which focus only on incentives. Article XIII. A of the proposed Final 
Judgment provides that all of the complex provisions of the decree will 
abruptly terminate in the event ``an Independent System Operator has 
assumed control of Pacific's gas pipelines within California in a 
manner satisfactory to the United States.\30\ Termination under these 
circumstances would be appropriate in DOJ's view, because
---------------------------------------------------------------------------

    \30\ Proposed Final Judgment at 33402.

[i]n that event, PE/Enova will lose the ability to control access to 
gas transportation and storage. Without these tools, the merged 
company will not be able to raise the price for electricity sold 
through the [PX] by reducing its gas sales, and the basis for the 
Final Judgment would be removed.\31\
---------------------------------------------------------------------------

    \31\ CIS at 33406 (emphasis added).

Thus, DOJ's own reasoning supports the position that the only way to 
completely eliminate the merged company's ability to increase 
electricity prices is to eliminate Pacific's control over its gas 
transportation and storage assets. This structural remedy serves the 
public interest because it addresses the core competitive problem and 
is certain to be effective over the long term. No policing is 
---------------------------------------------------------------------------
necessary.

    The staff of the Bureau of Economics of the Federal Trade 
Commission (``FTC'') recently expressed its view that structural 
remedies aimed directly at the source of market power are the most 
effective remedies because such structural remedies alter incentives 
(by eliminating the ability to exercise market power) while behavioral 
remedies do not:

    As a general proposition, we have found that structural 
remedies, such as divestiture in merger cases, are the most 
effective and require the least amount of subsequent monitoring by 
government agencies. The effectiveness of structural remedies lies 
in the fact that they directly alter incentives. Behavioral 
remedies, in contrast, leave incentives for discriminatory behavior 
in place and impose a substantial burden on government agencies to 
monitor subsequent conduct.
    In 1995, with regard to competition in electric generation and 
transmission, we suggested that FERC [the Federal Energy Regulatory 
Commission] promote independent system operators (ISOs) to control 
the regional electric transmission grids, as an alternative to 
ordering divestiture of transmission lines or relying solely on open 
access rules to promote competition in electric generation 
markets.\32\

    \32\ Comments of the Staff of the Bureau of Economics of the 
Federal Trade Commission Before the Public Utilities Commission of 
Texas, at 2 (June 19, 1998). See Aff. at para. 13. Adoption of a 
structural remedy aimed at the source of the market power would be 
consistent with traditional antitrust policy and precedent. See, 
e.g., California v. American Stores Cos., 495 U.S. 271, 294 n.28 
(1990) (citing 2 P. Areeda & D. Turner, Antitrust Law Sec. 328b 
(1978) (``[D]ivestiture is the normal and usual remedy against an 
unlawful merger''.); United States v. American Cyanamid Co., 719 
F.2d 558, 565 (2d Cir. 1983) (citing Ford Motor Co. v. US, 405 U.S. 
562,573 (1972) (``[D]ivestiture is not uncommonly the appropriate 
relief when a Section 7 violation is proven''). See also United 
States v. Merc & Co., Inc., Proposed Final Judgment and Competitive 
Impact Statement, 45 F.R. 60044 (1980) (ordering divestiture of 
assets that would give the defendant the ability to exercise market 
power in violation of Section 7 of the Clayton Act and Sections 1 
and 2 of the Sherman Act).

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[[Page 3560]]

Thus, as explained by Dr. Carpenter, in a merger of electricity 
transmission and generation companies, the FTC would focus its relief 
on the source of the market power--the transmission facilities--rather 
than the generation facilities that provide the incentive to engage in 
the anti-competitive activity.\33\
---------------------------------------------------------------------------

    \33\ Aff. at para. 13.

    Earlier this year in an analogous situation, the FTC entered into a 
consent order settling a challenge to a proposed acquisition by an 
electric power company of a coal supplier.\34\ Like the merger in the 
present case involving electricity and natural gas pipelines, the FTC 
found that a merger involving electricity and coal posed a direct 
threat to competition in western U.S. electricity markets. In so 
concluding, the FTC made findings remarkably similar to DOJ's findings 
in this case:
---------------------------------------------------------------------------

    \34\ PacifiCorp/The Energy Group, File No. 971 0091. PacifiCorp, 
headquartered in Portland, Oregon, makes electricity sales 
throughout the western United States. The Energy Group PLC 
(``TEG''), headquartered in London, England, is a diversified energy 
company that owns, among other things, Peabody Coal Company, which 
produces roughly 15 percent of the coal mined in the United States. 
See FTC Restructures Electric/Coal Combination to Ensure that All 
Consumers Reap Low Prices From Electricity Deregulation, FTC News 
Release, Feb. 18, 1998.

     ``PacifiCorp's acquisition of Peabody, which is the 
exclusive supplier of coal to certain power plants that compete with 
PacifiCorp's own power plants, raises antitrust concerns.'' \35\
---------------------------------------------------------------------------

    \35\ Analysis of Proposed Consent Order to Aid Public Comment 
(``Analysis'') at 4.

     During off-peak periods in the western United States, 
``coal-fired plants frequently are the price-setting, marginal 
plants.'' \36\
---------------------------------------------------------------------------

    \36\ Analysis at 3.
---------------------------------------------------------------------------

     PacifiCorp's acquisition ``would give PacifiCorp the 
power to raise the price (or otherwise diminish the availability) of 
coal, a necessary input for any firm seeking to compete with 
PacifiCorp in electricity generation.'' \37\
---------------------------------------------------------------------------

    \37\ Statement of The Federal Trade Commission Upon Withdrawal 
From Consent Agreement, In the Matter of PacifiCorp, File No. 971 
0091, (``Statement'') at 1 (emphasis added).
---------------------------------------------------------------------------

     ``PacifiCorp would have an incentive to increase fuel 
costs at Navajo and Mohave in order to drive up the market price of 
electricity in the western United States.'' \38\
---------------------------------------------------------------------------

    \38\ Analysis at 4 (emphasis added).

Prior to the acquisition, the coal supplier (Peabody) had the ability 
to raise coal prices to competing electric generators, but it had no 
incentive to do so. On the other hand, before the acquisition, the 
electricity company (PacifiCorp.) had the incentive to increase 
electricity prices but lacked the ability. It was the merger of the 
two, bringing together that ability and that incentive, that gave rise 
---------------------------------------------------------------------------
to the FTC's concerns.

    In stark contrast to DOJ's remedy in the present proceeding, the 
FTC in PacifiCorp/The Energy Group did not hesitate to adopt a remedy 
which went to the heart of the market power problem identified in the 
FTC's complaint. The FTC proposed a remedy that required PacifiCorp to 
divest Peabody Western Coal Company--the owner of the coal mines that 
conferred market power on the merged firm and enabled it to increase 
fuel prices at competing generating facilities (Navajo and Mohave). 
And, the FTC directly addressed and rejected the proposals of several 
commenters who had recommended conduct/behavioral remedies to resolve 
the antitrust problem:

     ``Public comments on the consent agreement recommended 
that we substitute conduct provisions for the order's divestiture 
requirement, but we were not persuaded that the suggested course of 
action would be preferable.'' \39\
---------------------------------------------------------------------------

    \39\ Statement at 1 n.1.
---------------------------------------------------------------------------

     ``The divestiture remedy is consistent with 
longstanding Commission policy which favors the structural approach 
to remedies, rather than the behavioral approach which seeks to 
govern conduct through the use of rules.'' \40\
---------------------------------------------------------------------------

    \40\ Analysis at 8. The merger never was consummated because 
PacifiCorp subsequently withdrew its bid in the face of a competing 
offer. In closing the investigation, the FTC stated: ``Absent this 
turn of events, the Commission would have been inclined to issue the 
final order against PacifiCorp without modification.'' Statement at 
1.

    In both PacifiCorp and this case, the fuel supply assets are the 
source of the competitive problem identified by the federal enforcement 
authorities. The simple, direct way to remedy that problem is to cut 
out and divest those assets or require that they be controlled by an 
independent system operator.
C. The Remedies Adopted in the Proposed Final Judgment Fail To 
Effectively Curb the Merged Company's Incentive To Manipulate 
Electricity Prices
    As explained above, DOJ made no pretext of selecting a remedy 
designed to address the gas market power problem. Rather, DOJ focused 
all of its attention on the electricity side of the merged company's 
business and proposed a complicated set of conditions that are supposed 
to curb the incentive of the merged company to manipulate electricity 
prices. DOJ's theory is that if there is no financial gain to be made 
from electricity price manipulations, then the merged company likely 
would not engage in such conduct even if it possessed the power and 
ability to do so. There is nothing wrong with this theory from an 
analytical point of view. But having chosen this least attractive 
remedial approach, DOJ needed to `'get it right'' by understanding, 
anticipating, and then prohibiting all the various means by which the 
merged company could seek to retain or create incentives to earn 
profits through electricity price manipulations. DOJ, however, did not 
do so.
    The proposed Final Judgment requires and allows the following:
     Enova is required to sell its Encina and South Bay 
electricity generation facilities, totaling some 1650 megawatts, to 
a purchaser acceptable to DOJ.\41\
---------------------------------------------------------------------------

    \41\ Proposed Final Judgment art. IV(A) at 33398 (requiring 
divestiture) & (D)(3) at 33398 (specifying DOJ's right to prior 
approval of purchaser) & (I) at 33399 (specifying the criteria for 
DOJ approval). The divestiture is to occur within eighteen months, 
subject to extension by DOJ, or a trustee will be appointed. 
Proposed Final Judgment art. IV(E) at 33399.

     Enova is enjoined from acquiring ``California 
Generation Facilities'' without prior notice and approval of DOJ. 
\42\
---------------------------------------------------------------------------

    \42\ Proposed Final Judgment art. V(A)(1). The term ``California 
Generation Facilities'' is defined to mean electricity generation 
facilities in California in existence on January 1, 1998, and any 
contract to operate and sell output from generating assets of the 
Los Angeles Department of Water and Power (``LADWP''). Proposed 
Final Judgment art. II(B) at 33397. ``Acquire'' is defined to mean 
``obtaining any interest in any electricity generating facilities or 
capacity, including but not limited to, all real property * * * 
capital equipment * * * or contracts related to the generation 
facility, and including all generation, tolling, reverse tolling, 
and other contractual rights.'' Proposed Final Judgment art II(A).
---------------------------------------------------------------------------

     Enova is enjoined from entering any contracts that 
allow it to ``control any California Generation Facilities'' without 
prior notice and approval of DOJ.\43\
---------------------------------------------------------------------------

    \43\ Proposed Final Judgment art. V(A)(2) at 33399. ``Control'' 
means to have the ability to set the level of output of an 
electricity generation facility.'' Proposed Final Judgment art. 
II(E) at 33398.
---------------------------------------------------------------------------

     In general, Enova is allowed to acquire or control up 
to 500 MW of capacity of California Generation Facilities without 
prior DOJ approval.\44\
---------------------------------------------------------------------------

    \44\ Proposed Final Judgment art. V(B)(1) at 33399. The cap may 
be increased to 800 MW upon Enova's sale of all of its existing 
nuclear generating capacity, but only up to 10% of its total retail 
electricity sales. Proposed Final Judgment art. XIII(D) at 33402.
---------------------------------------------------------------------------

     Enova is allowed to ``own, operate, control, or acquire 
any electricity generation facilities other than California 
Generation Facilities [and] any cogeneration or renewable generation 
facilities in California.'' \45\
---------------------------------------------------------------------------

    \45\ Proposed Final Judgment art. V(C)(1) and (2) at 33399.
---------------------------------------------------------------------------

     Enova is also allowed to ``enter into tolling and 
reverse tolling agreements with any electricity generation 
facilities in

[[Page 3561]]

California,'' provided it does not ``control'' them.\46\
---------------------------------------------------------------------------

    \46\ Proposed Final Judgment art. (V)(C)(3) at 33399.

    As explained by Dr. Carpenter, these remedies are ineffective 
because they are incomplete.\47\ While their aim is to curb the merged 
company's incentives to harm competition by restricting its 
participation in certain activities, they also allow other activities 
that can completely undo what DOJ seeks to achieve. It is as if DOJ 
closed one door to anti-competitive activity but left wide open several 
other doors.
---------------------------------------------------------------------------

    \47\ Aff. at Paras. 19, 21.
---------------------------------------------------------------------------

    The rationale underlying DOJ's required divestiture of the 1650 of 
the 1650 MW of Enova generating facilities is that infra-marginal 
assets (assets that are low-cost relative to the market price of 
electricity) create incentives through the price-clearing mechanism in 
the PX for the merged company to manipulate gas prices. As stated by 
DOJ:
    The Final Judgment requires Defendant to sell all generation 
assets that would likely give PE/Enova the inventive to raise 
electricity prices. [footnote excluded] To that end, the Final 
Judgment requires Defendant to divest all of its low-cost gas 
generators * * *. Because these generators operate in almost all 
hours of the year and are relatively low-cost, if PE/Enova were to 
own them, it could earn substantial profits (revenues exceeding its 
costs) by restricting the supply of natural gas which, as explained 
above, would increase the overall price for electricity in the pool 
and thus the prive PE/Enova would receive for electricity.\48\

    \48\ CIS at 33404.

    But, what DOJ overlooked is that many other arrangements and 
transactions that are not prohibited by the proposed Final Judgment 
will allow the merged entity to directly, or indirectly through 
financial instruments, collect the earnings from infra-marginal 
generating facilities. Specifically, the proposed Final Judgmebnt has 
left in place significant anti-competitive incentives by permitting the 
merged company to:
     Build or acquire new or repowered generating facilities;
     Enter into tolling agreements;
     Enter into power generation management contracts;
     Enter into financial contracts tied to prices in the 
California electricity market

1. Acquisition of New or Repowered Generating Facilities

    While the merged company would generally be prohibited from owning 
or controlling existing California generating facilities over and above 
the 500 MW cap, the proposed Final Judgment allows it to build or 
acquire new generating facilities and to acquire plants that are 
rebuilt, repowered or activated out of dormancy after January 1, 1998. 
While adding new facilities is generally procompetitive, here that is 
not the case. Acquisition of new (or rebuilt/repowered/reactivated) 
generating facilities will create incentives to manipulate gas prices 
that the merged company does not have, easily undoing via vertical 
market power the otherwise positive horizontal effect of adding new 
generation facilities.\49\ DOJ required the divestiture of Enova's two 
generation plants because, as low-cost facilities, they could ``earn 
substantial profits'' under the PX pricing mechanism (see supra at p. 
22). That same rationale holds equally true for the types of generating 
facilities that the proposed Final Judgment permits the merged company 
to acquire.
---------------------------------------------------------------------------

    \49\ Aff. at para. 22.
---------------------------------------------------------------------------

    By way of example, consider two scenarios. In scenario one, the 
merged company divests 1650 MW of Enova's generating facilities, and 
then builds a 1650 MW facility to replace the lost output. Because of 
technology improvements, the new facility can be brought on-line with 
costs roughly equal to those of the old facilities. In scenario two, 
the merged company retains its 1650 MW of existing facilities and a 
disinterested third party builds a 1650 MW facility. In both scenarios, 
the market has the same amount of megawatts available for consumption 
and the merged company has roughly the same incentive to raise gas 
prices.\50\ The proposed Final Judgment permits scenario one but 
prohibits scenario two. A provision such as that can hardly be said to 
be within the reaches of the public interest.
---------------------------------------------------------------------------

    \50\ See Aff. at para. 23.
---------------------------------------------------------------------------

2. Tolling Agreements

    The proposed Final Judgment permits the merged company to enter 
into tolling or reverse tolling agreements so long as it does not 
control the level of the plant's output. Under a tolling agreement, a 
party who owns natural gas enters into a contract with the owner of the 
generating facility to use (``rent'') that facility, thereby allowing 
the gas-owning party to produce electricity for a set fee. The gas-
owning party can then sell the electricity at the market price, which 
may be higher or lower than the set fee.\51\
---------------------------------------------------------------------------

    \51\ Aff at para. 24.
---------------------------------------------------------------------------

    The problem is that tolling agreements are akin to virtual 
ownership because they provide the merged company with the same 
incentive to increase electricity prices as does physical ownership. 
And, the agreement need not provide for control of the plant's output 
for that incentive to exist. For example, the merged company could 
enter into tolling agreements with the two Enova generating facilities 
that it has agreed to divest. The facilities' operator, whoever that 
is, would bid into the PX at the facilities' marginal cost and the 
facilities would operate whenever the bids are successful. To the 
extent that the agreement provides the merged company with electricity 
at a fixed price, the company has an incentive to increase the PX price 
by increasing gas prices--it will simply pocket the additional 
revenue.\52\
---------------------------------------------------------------------------

    \52\ Aff. at para. 25.
---------------------------------------------------------------------------

    The failure of the proposed Final Judgment to close this gap is 
another reason to find it not in the public interest.

3. Power Generation Management Contracts

    A further reason to reject the proposed Final Judgment is due to 
its failure to prohibit the merged company from entering into 
management contracts under which it would operate a generation facility 
owned by a third party. Such arrangements are similar to tolling 
agreements in that they permit a sharing in a facility's profits.\53\
---------------------------------------------------------------------------

    \53\ Aff. at para. 26. A management contract may be structured 
to be more complex than a tolling agreement (e.g., clauses with 
operating cost incentives) but, in essence, both arrangements have a 
built-in incentive to make the facility as profitable as possible. 
Id.
---------------------------------------------------------------------------

    Importantly, the proposed Final Judgment recognizes the potential 
harm to competition that such contracts can cause. It requires the 
merged company to notify and/or obtain approval from DOJ for management 
contracts entered into with the Los Angeles Department of Water and 
Power and with the California Public Power Providers. These 
restrictions go part way to reducing incentives but apparently they do 
not apply to contracts relating to all other California generating 
facilities.\54\ Permitting such contracts for certain but not all 
California generating facilities is inconsistent and not in the public 
interest.
---------------------------------------------------------------------------

    \54\ There is some ambiguity due to the definition of 
``acquisition'' in the proposed Final Judgment. ``Acquire'' could be 
interpreted to prohibit any financial interest, or it could be 
interpreted to prohibit any ownership interest. The latter 
interpretation leaves open the possibility of entering into 
management contracts. See proposed Final Judgment at art. II(A); see 
also Aff. at para. 28.

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[[Page 3562]]

4. Financial Market Contracts

    Finally, the proposed Final Judgment fails to place any 
restrictions whatsoever on the merged company's ability to enter into 
financial contracts (e.g., forwards, futures, options and other 
derivatives) that provide the same incentive to increase electricity 
prices.\55\ Financial contracts can be used to approximate the same 
financial position the merged company would have by virtue of owning 
generation facilities.\56\ The merged company, for example, could 
contract for a one-year call option for 1000 MW of output at a certain 
``strike price.'' The higher the electricity market price is above the 
strike price, the greater the profit when the option is exercised.\57\
---------------------------------------------------------------------------

    \55\ A forward contract is a non-standardized bilateral contract 
for future delivery of electricity at a pre-specified price. A 
futures contracts is a standardized forward contract that is traded 
on an organized exchange. California-Oregon border and Palo Verde 
electricity futures contracts, both of which are traded on the New 
York Mercantile Exchange, are accessible to the California market. 
Option contracts, which can be either traded on an exchange or done 
bilaterally, include additional flexibility for the buyer or the 
seller. For example, a call option gives the buyer the right but not 
the obligation to purchase electricity in the future at a specified 
price. Aff. at para.29 fn.9.
    \56\ Aff. at para.29.
    \57\ Aff. at para.29.
---------------------------------------------------------------------------

    As explained by Dr. Carpenter, financial contracts have the 
potential to foster more anti-competitive creativity than ownership of 
generation facilities because they are more flexible. While it is 
difficult to change ownership, it is simple to contract for electricity 
in varying amounts over differing time horizons and to change positions 
quickly and frequently. This flexibility allows the merged company to 
tailor its electricity market position to most advantage itself.\58\
---------------------------------------------------------------------------

    \58\ Aff. at para.29.
---------------------------------------------------------------------------

    Both individually and collectively, the shortcomings of the 
proposed Final Judgment are significant because they completely 
undermine DOJ's effort to curb the merged entity's incentive to 
increase electricity prices. DOJ's failure to eliminate this incentive 
renders the proposed Final Judgment ineffective and thus outside the 
reaches of the public interest. This Court should reject it as 
presently written.

        Respectfully submitted,
Kevin J. Lipson,
Mary Anne Mason,
Hogan & Hartson LLP, Columbia Square, 555--Thirteenth Street, NW, 
Washington, DC 20004-1109. (202) 637-5600.
Stephen E. Pickett,
Douglas Kent Porter,
Southern California Edison Company, P.O. Box 800, 2244 Walnut Grove 
Avenue, Rosemead, California 91770. (626) 302-1903.
J.A. Bouknight, Jr.,
David R. Roll,
Steptoe & Johnson LLP, 1330 Connecticut Avenue, NW, Washington, DC 
20036. (202) 429-3000.

Affidavit of Paul R. Carpenter

Kevin J. Lipson,
Mary Anne Mason,
Hogan & Hartson LLP, Columbia Square, 555--Thirteenth Street, NW, 
Washington, DC 20004-1109. (202) 637-5600.
Stephen E. Pickett,
Douglas Kent Porter,
Southern California Edison Company, P.O. Box 800, 2244 Walnut Grove 
Avenue, Rosemead, California 91770. (626) 302-1903.
J.A. Bouknight, Jr.,
David R. Roll,
Steptoe & Johnson LLP, 1330 Connecticut Avenue, NW, Washington, DC 
20036. (202) 429-3000.
    Dated: August 17, 1998.

    1. My name is Paul Carpenter. I am a Principal of The Brattle 
Group, an economic and management consulting firm with offices at 44 
Brattle Street, Cambridge, Massachusetts 02138, in Washington D.C., and 
London, England.
    2. I am an economist specializing in the fields of industrial 
organization, finance, and regulatory economics. I received a Ph.D. in 
Applied Economics and an M.S. in Management from the Massachusetts 
Institute of Technology, and a B.A. in Economics from Stanford 
University. Since the early 1980s, I have been involved in research and 
consulting regarding the economics and regulation of the natural gas, 
oil, and electric power industries in North America, the United 
Kingdom, and Australia. I have testified frequently before the Federal 
Energy Regulatory Commission (``FERC''), the Public Utilities 
Commission of the State of California (``CPUC''), other state and 
Canadian regulatory commissions, federal courts, the U.S. Congress, the 
British Monopolies and Mergers Commission, and the Australian 
Competition Tribunal on issues of pricing, competition and regulatory 
policy in the natural gas and electric power industries. For at least 
ten years I have been extensively involved in the evaluation of the 
economics and structure of the natural gas industry in California, 
including the interstate pipelines that serve the state, appearing as 
an expert witness in many CPUC, FERC and Canadian regulatory 
proceedings regarding the certification and pricing of interstate 
pipeline capacity to California. Further details of my professional and 
educational background and a listing of my publications are provided in 
my curriculum vitae appended as Attachment A.

Introduction and Summary of Opinion

    3. I have been asked by Southern California Edison Company 
(``Edison'') to prepare this affidavit. Its purpose is to evaluate 
whether the U.S. Department of Justice (``DOJ'') Final Judgment in this 
proceeding (as further explained in its accompanying Competitive Impact 
Statement (``CIS'')) remedies the competitive problem identified in 
DOJ's Complaint--namely, that as a result of their merger, Pacific 
Enterprises (``Pacific'') and Enova Corporation (``Enova'') will have 
the incentive and ability to lessen competition in the market for 
electricity in California.
    4. The DOJ observed correctly in its Complaint and CIS that the 
merger will give the combined company (``the Merged Entity'') both the 
incentive and the ability to harm competition in the California 
electricity market by limiting the supply and/or raising the price of 
natural gas supplied to gas-fired electric generating plants in 
southern California.
    5. In my opinion, the Proposed Final Judgment does not remedy the 
serious competitive problem identified by the DOJ in its complaint. The 
bases for my opinion are summarized here and elaborated upon in the 
remainder of this affidavit:
     The DOJ correctly concluded that the merger will give the 
Merged Entity both the ability and incentive to raise electricity 
prices in southern California.
     The DOJ could have remedied this competitive problem by 
eliminating the ability of the Merged Entity to exercise market power 
by requiring either:
     The divestiture of Pacific's intrastate natural gas and 
storage assets to a third party; or
     The creation of an Independent System Operator to hold and 
operate Pacific's natural gas assets.
     This type of structural remedy is favored by antitrust 
authorities because it is aimed directly at the source of the 
competitive problem--market power--and it is clean and easy to enforce, 
requiring no ongoing administrative involvement in reviewing the 
conduct and performance of the suspect market.

[[Page 3563]]

     The remedy chosen by the DOJ is to leave the Merged 
Entity's market power intact, and instead to try to curb the Merged 
Entity's incentives to harm competition by requiring the sale of two 
generating plants and by restricting its participation in certain 
activities. This remedy is ineffective. Not only does it leave market 
power intact, it fails to eliminate significant anticompetitive 
incentives that are equivalent financially to the ownership of the two 
power plants.
     The Proposed Final Judgment has left in place significant 
anti-competitive incentives by permitting the Merged Entity to:
     Build or acquire new or repowered generating capacity.
     Enter into tolling agreements or management contracts.
     Enter into financial contracts (e.g., forwards, futures, 
options and other derivatives) for electricity.
     These overlooked capabilities are a very real part of the 
incentives of the Merged Entity, are a standard part of the package of 
services of any major energy marketer, and they are consistent with the 
avowed strategic business plans of the Merged Entity.

The Competitive Problem Associated With the Merger

    6. Pacific, through its wholly owned subsidiary Southern California 
Gas Company (``SoCalGas''), is effectively the sole provider of 
intrastate natural gas transmission and storage services to almost all 
of the gas-fired electric generating plants in southern California. As 
a consequence of this market power, SoCalGas has the ability to limit 
the supply and/or raise the price of natural gas to gas-fired plants. 
Prior to the merger, however, it had no strong incentive to do so 
because it had no position in or control over electricity markets.
    7. The DOJ has recognized Pacific's ability to restrict the 
availability of gas transportation and storage to gas-fired generators, 
and to raise the price of delivered gas to such generators:
    Gas-fired power plants cannot and do not switch to other fuels in 
response to price increases in natural gas transportation or storage 
services, and in California Pacific controls almost all gas-fired 
generators' access to gas supply because the state of California has 
granted Pacific a monopoly on transportation of natural gas within 
southern California. Consequently, 96% of gas-fired generators in 
southern California buy gas transportation services from it. Pacific 
also has a monopoly on all natural gas storage services throughout 
California. Although regulated by the California Public Utilities 
Commission (``CPUC''), Pacific has the ability to restrict the 
availability of gas transportation and storage to consumers, including 
gas-fired generators, by limiting their supply or cutting them off 
entirely. Limiting or cutting off gas supply raises the price gas-fired 
plants pay for delivered natural gas and in turn raises the cost of 
electricity they produce.\1\
---------------------------------------------------------------------------

    \1\ Competitive Impact Statement (Case 98-CV-583), at 5-7. See 
also Complaint, at 6.
---------------------------------------------------------------------------

    8. The Merged Entity has numerous means to raise prices or limit 
supply to gas-fired generators in the southern California market. These 
means are derived primarily from SoCalGas' control of the intrastate 
transmission, distribution and storage system in southern California, 
its role as gas buyer for ``core'' residential and small commercial 
customers, and its holding of excess interstate pipeline capacity under 
long-term contract.
     Intrastate transmission and storage access. As operator of 
the intrastate transmission, distribution and storage system. SoCalGas 
has considerable authority and autonomy to determine which gas will 
flow and under what conditions. It decides on the amount of intrastate 
capacity available at each interstate pipeline interconnect, based on 
subjective procedures that are not articulated in any tariff or 
internal procedural manual. It also has discretion in determining 
storage availability.
     Pricing of intrastate services. As the provider of hub and 
storage services, SoCalGas is allowed under California regulation to 
exercise pricing discretion with regard to certain negotiated services. 
These services include short-term balancing or emergency supply 
services.
     Interstate access and pricing.  SoCalGas has discretion in 
determining the price and quantity of capacity it makes available in 
secondary (``capacity release'') markets. This discretion presents the 
Merged Entity with one more means by which to influence the delivered 
price of gas to its electricity market rivals.
     Core procurement behavior. SoCalGas has substantial 
flexibility in its core-related storage injection and withdrawal 
decisions that allows it to determine the volume of flowing supplies on 
a day-to-day basis, notwithstanding customer demand.
     Use of operational information. As the operator of the 
intrastate natural gas transportation and storage system. SoCalGas 
possesses considerable operational information that is extremely 
valuable in the restructured natural gas and electricity markets. For 
example, as system operator. SoCalGas will receive regular nomination 
information from all of its shippers. Because SoCalGas has considerable 
discretion in operating its system, it can do so in a manner that can 
result in the manipulation of prices and access, and thus the cost of 
rivals of using its system. Such manipulations would be almost 
impossible to detect, difficult to prove, and not readily subject to 
cure.
    Each one of these advantages is sufficiently potent to enable to 
the Merged Entity to manipulate the price of gas and/or the quality of 
service to electricity generators.
    9. As of March 31, 1998, California launched the Power Exchange 
(PX), through which much of the electricity is now bought and sold in 
California. The PX's price per unit of electricity for any given hour 
is determined by the bid of the marginal generator--the most expensive 
generator required to meet load in that hour. All sellers receive the 
marginal price, regardless of their bid, and all buyers pay the 
marginal price. As DOJ has acknowledged, because of California's mix of 
generating capacity, gas-fired generators usually are the marginal 
suppliers, and the marginal-cost pricing instituted by the PX means 
that the price bid by gas-fired generators will set electricity prices 
in the California market the majority of the time.\2\ The marginal bid 
price setting mechanism of the PX means that California gas-fired 
capacity will have a dominant effect on electricity prices.\3\
---------------------------------------------------------------------------

    \2\ To illustrate, Attachment B to this affidavit depicts the 
electricity supply curve for both utility and non-utility generating 
resources for the entire Western Systems Coordinating Council 
(WSCC). This supply curve distinguishes gas-fired capacity and 
California gas-fired capacity from other generation capacity. As 
illustrated, actual load (which varies by time of day and 
seasonally) falls within a band of 70,500 MW to 93,500 MW 
approximately two-thirds of the time. Within this same band of the 
supply curve, 90% of the capacity is gas-fired capacity, and 69% is 
California gas-fired capacity.
    \3\ While not all California gas-fired capacity is served by 
SoCalGas, the majority of it is, and it has been found that the 
prices paid in northern California for gas delivered by Pacific Gas 
& Electric Co. (PG&E) are determined by the gas supply alternatives 
available at the southern California border. See CPUC Decision 97-
08-055. August 1, 1997, at p.10.
---------------------------------------------------------------------------

    10. Enova, through its wholly owned subsidiary, San Diego Gas & 
Electric (SDG&E), owns gas-fired electric generating stations and 
controls over 2,600 MW of electric generating capacity. DOJ recognized 
that SDG&E's control of substantial quantities of electricity sold into 
the PX gives SDG&E and incentive to raise the PX's electricity price, 
making sales of its own

[[Page 3564]]

electricity more profitable. To this existing incentive, the merger 
with Pacific adds the ability to increase the price of electricity. The 
Merged Entity can accomplish this by increasing the price of natural 
gas to gas-fired generating plants in southern California, which in 
turn will raise their cost of producing electricity. Because California 
gas-fired capacity dominates the electric margin, this will increase 
the PX's price per unit of electricity to all sellers.\4\
---------------------------------------------------------------------------

    \4\ Much of the gas-fired generating capacity in California is 
currently under temporary ``must-run'' contracts for reliability, 
which when invoked will prevent these units from setting, or 
profiting from, the PX price. However, this will have no effect when 
must-run conditions are not declared, and the arrangement is 
scheduled to expire in three years.
---------------------------------------------------------------------------

Failure of the Proposed Final Judgment To Impose a Structural Remedy 
Aimed at Market Power

    11. The proposed Final Judgment fails to eliminate the competitive 
harm caused by the PE/Enova merger because: (1) it does not contain any 
provisions designed to curb the Merged Entity's ability to harm 
competition through its monopoly over natural gas transportation and 
supply, and (2) while it requires SDG&E to divest ownership of two gas-
fired electric generating plants, it permits the Merged Entity to 
replicate ownership by entering into contractual arrangements which 
offer the same incentives to engage in anti-competitive activity.
    12. The proposed Final Judgment fails to impose the obvious, 
traditional, and assuredly effective remedy to a market power problem 
in a merger proceeding. It could have eliminated the ability of the 
Merged Entity to harm competition by eliminating its ability to 
exercise market power. It could have done this by requiring the 
divestiture of Pacific's intrastate natural gas transmission and 
storage assets, or by requiring the creation of an Independent System 
Operator (``ISO'') for those assets.
    13. The staff of the Bureau of Economics of the Federal Trade 
Commission has recently expressed its view that structural remedies 
(such as ISOs) aimed directly at the source of market power are the 
most effective remedies because such structural remedies alter 
incentives (by eliminating the ability to exercise market power) while 
behavioral remedies do not:

    As a general proposition, we have found that structural 
remedies, such as divestiture in merger cases, are the most 
effective and require the least amount of subsequent monitoring by 
government agencies. The effectiveness of structural remedies lies 
in the fact that they directly alter incentives. Behavioral 
remedies, in contrast, leave incentives for discriminatory behavior 
in place and impose a substantial burden on government agencies to 
monitor subsequent conduct.
    * * * In 1995, with regard to competition in electric generation 
and transmission, we suggested that FERC [the Federal Energy 
Regulatory Commission] promote independent system operators (ISOs) 
to control the regional electric transmission grids, as an 
alternative to ordering divestiture of transmission lines or relying 
solely on open access rules to promote competition in electric 
generation markets.\5\
---------------------------------------------------------------------------

    \5\ Comments of the Staff of the Bureau of Economics of the 
Federal Trade Commission Before the Public Utilities Commission of 
Texas, at 2 (June 19, 1998).

    I agree with this view. Thus, for example, in a merger of 
electricity transmission and generation companies, the FTC would focus 
its relief on the source of the market power--the transmission 
facilities--rather than the generation facilities that provide the 
incentive to engage in anti-competitive activity. As stated above, the 
FTC would place the transmission facilities in the hands of an 
independent entity, an ISO, and would prevent those facilities, which 
confer market power, from being controlled by the merged entity.
    14. In remedying the anti-competitive effects of vertical mergers 
like the present one, the antitrust authorities have opted, and should 
continue to opt, for structural remedies that eliminate the source of 
the market power. Recently, in addressing the anti-competitive effects 
of a proposed merger between an electric utility and a coal company, 
the FTC insisted on divestiture of the coal supply assets that were the 
source of the market power which in turn led to anti-competitive 
control over electricity prices. I agree with this approach and this 
remedy. A copy of the FTC's reasoning in that case is appended as 
Attachment C.
    15. A structural remedy in this case, requiring intrastate gas 
transmission and storage divestiture or the creation of an ISO, would 
eliminate cleanly the Merged Entity's ability to control the price of 
electricity in California, and it would eliminate the enforcement 
difficulties associated with behavioral remedies that attempt to 
control anti-competitive incentives after the fact.\6\
---------------------------------------------------------------------------

    \6\ Nowhere in its CIS does DOJ explain why it has failed to 
impose a remedy that eliminates the ability of the merged entity to 
raise prices.
---------------------------------------------------------------------------

The Proposed Final Judgment Does Not Remedy the Competitive Problem 
Identified by DOJ

    16. The proposed Final Judgment does not attempt to eliminate the 
Merged Entity's market power over natural gas transportation and 
storage which gives it the ability to harm competition and raise prices 
in electricity markets. Instead, DOJ has chosen to attempt to curb the 
Merged Entity's incentive to harm competition by requiring Enova to 
divest itself of 1,644 MW of generation assets, namely, the Encina and 
South Bay gas-fired electricity generating plants. In addition, the 
Final Judgment caps the Merged Entity's ownership of California 
electricity generation assets at 500 MW.\7\ The Final Judgment also 
enjoins the Merged Entity from acquiring electricity generation 
facilities in California which were in existence on January 1, 1998 
(except facilities that are rebuilt, repowered, or activated out of 
dormancy after January 1, 1998) and/or entering into any contract for 
operation and sale of output from generating assets of Los Angeles 
Department of Water and Power (``LADWP''), without prior notice to, and 
approval of, the United States. Finally, the Final Judgment enjoins the 
Merged Entity from entering into any contracts that allow it to control 
the output of electricity generation facilities in California in 
existence on January 1, 1998 without prior notice to and approval of 
the United States.
---------------------------------------------------------------------------

    \7\ Since nuclear plants in California will remain price 
regulated (i.e., will not receive the PX price) until 2001, Enova's 
20% (430 MW) interest in the San Onofre Nuclear Generating Station 
(``SONGS'') will not be included in the 500 MW cap. If nuclear power 
prices become deregulated after 2001, SONGS capacity will be 
included in the cap and the period of the final judgment will be 
extended from five to ten years. A 75 MW contract with Portland 
General Electric will be included in the cap, unless the contract is 
terminated or divested. Finally, the capacity of the Encina and 
South Bay generation facilities will be included in the cap for as 
long as Enova owns these assets.
---------------------------------------------------------------------------

    17. Importantly, this merger involves much more than an effort to 
combine SDG&E's electricity generation assets with SoCalGas' natural 
gas transmission and distribution assets. The problem with the merger 
is that it combines SDG&E's expertise in profiting through the 
acquisition and sale of electric power with SoCalGas' ability to 
control the price of natural gas in California through its monopoly 
over natural gas transportation and storage services in California.\8\ 
As explained further below, this combination of electricity expertise 
and natural gas control creates a serious competitive problem that is 
not remedied by the divestiture of assets and other conditions set 
forth in the Final Judgment. Specifically, such

[[Page 3565]]

electricity expertise could be used to enter into tolling agreements, 
management contracts and forward and futures contracts that perpetuate 
the Merged Entity's incentive to manipulate gas prices for anti-
competitive ends, notwithstanding the Final Judgment's generation 
ownership restrictions.
---------------------------------------------------------------------------

    \8\ The California Commission noted in its merger decision that 
``* * * each company sees unregulated energy services (particularly 
electricity marketing) as a way to increase earnings. But each feels 
that it lacks critical skills and physical assets.'' See D. 98-03-
073, at 24.
---------------------------------------------------------------------------

    18. As a general matter, it is extremely difficult to eliminate all 
of the anti-competitive incentives facing a utility in a restructured, 
partially deregulated wholesale electricity market. Those incentives 
manifest themselves in many different ways--only one of which is 
through ownership of existing gas-fired plants. Yet to be confident 
that the harm is competition is eliminated (when the ability to 
exercise market power remains), the antitrust authority or regulator 
must identify all of the potential incentives to profit from market 
manipulation and then design remedies that will curb each and every 
incentive. As explained below, the Final Judgment fails to curb very 
significant incentives.
    19. The Competitive Impact Statement (CIS) correctly defines the 
Merged Entity's incentive but misconstrues the relationship between the 
kinds of transactions the Merged Entity might pursue and the incentives 
that would be created. As a result, the behavioral remedies put forward 
in the Final Judgment eliminate only part of the Merged Entity's 
incentives to raise prices.
    20. The CIS recognizes that infra-marginal assets (assets that are 
low-cost relative to the market price of electricity) create incentives 
through the price-clearing mechanism in the California PX for the 
Merged Entity to manipulate gas prices. For example, the CIS states (at 
page 9):

    The Final Judgment requires Defendant to sell all generation 
assets that would likely give PE/Enova the incentive to raise 
electricity prices [footnote excluded] To that end, the Final 
Judgment requires Defendant to divest all of its low-cost gas 
generators * * *. Because these generators operate in almost all 
hours of the year and are relatively low-cost, if PE/Enova were to 
own them, it could earn substantial profits (revenues exceedings its 
costs) by restricting the supply of natural gas which, as explained 
above, would increase the overall price for electricity in the pool 
[PX] and thus the price PE/Enova would receive for electricity.

    21. In making this finding, the DOJ overlooks the fact that many 
other arrangements and transactions that are not prohibited by the 
proposed Final Judgment create financial positions equivalent to, and 
potentially even more profitable than, the physical ownership of an 
infra-marginal generating unit. Any arrangement that allows the Merged 
Entity to collect or share in the earnings of an infra-marginal 
generator will give it the incentive to manipulate the spot price of 
power by increasing gas prices. The Final Judgment does not prohibit, 
and in fact explicitly allows, several such arrangements. Under the 
Final Judgment, the Merged Entity is allowed to (1) acquire new, 
rebuilt or repowered generation, (2) enter into tolling agreements with 
third-party generation owners, (3) enter into power generation 
management contracts, and (4) take forward contractual positions in the 
electricity market. All of these permitted transactions allow the 
Merged Entity to profit by manipulating the price of electric power, 
and will risk the abuse of market power as long as the Merged Entity 
has the continuing ability to influence gas prices that the CIS has 
acknowledged. As I explain below, in each of these situations the Final 
Judgment's restrictions simply do not eliminate the Merged Entity's 
incentives to exercise market power.

New or Repowered Generation Capacity

    22. Under the proposed Final Judgment, the Merged Entity would be 
prohibited from owning or controlling existing generating facilities, 
but it is permitted to built or acquire new generating capacity and to 
gain control of plants that are rebuilt, repowered or activated out of 
dormancy after January 1, 1998. However, the addition of new generation 
by the Merged Entity is not necessarily benign. All else equal, adding 
generating capacity is usually procompetitive. However, in this case, 
all else is decidedly unequal. Allowing the Merged Entity to acquire 
new generation (or to rebuild, repower or reactivate generation) will 
give it incentives to manipulate gas prices which it would not 
otherwise have, easily undoing via vertical market power the otherwise 
positive horizontal effect of adding capacity. By giving the Merged 
Entity an incentive to raise gas prices, ownership of new or repowered 
generation could lead to an across-the-board increase in the cost of 
most of the margin-setting capacity in the market. Thus, the Final 
Judgment should prohibit the acquisition of new generating capacity for 
the same reason it requires divestiture of existing capacity. Holding 
any sort of interest in generating capacity eligible for the PX price 
gives the Merged Entity an incentive to exercise its market power in 
the gas market, to the detriment of the electricity market.
    23. Another way to view this is by considering two scenarios: (A) 
the Merged Entity divests its existing generation to a third party, and 
builds a new generator, or (B) the Merged Entity keeps its existing 
generation and a disinterested third party builds the new generator. In 
both scenarios, the market has the same amount of generation, and the 
Merged Entity has essentially the same incentive to raise gas prices. 
However, while the CIS correctly recognizes (B) as problematic, the 
Final Judgment explicitly (though incorrectly) allows (A), the 
acquisition of new or repowered capacity.

Tolling Agreements

    24. In a ``tolling'' agreement, one party contracts for the use of 
another party's generating capacity, allowing the first party to 
convert its own gas into electricity for a set fee. The first party can 
then sell the electricity at the market price, and will be able to 
collect the associated profit (or loss) as if it owned the generator. 
The proposed Final Judgment explicitly allows the Merged Entity to 
enter into tolling agreements, so long as it does not control the 
plant's output level in the process.
    25. Tolling agreements create virtual ownership positions in power 
plants, and provide the Merged Entity with the same incentives to 
increase electricity prices as does physical plant ownership. A tolling 
agreement would allow the Merged Entity to receive all or most of the 
generator's infra-marginal net revenues, whether or not it controls the 
plant's output level. The proposed Final Judgment's restriction against 
controlling plant output displays a misconception of how the Merged 
Entity could exercise market power. It is not by withholding generating 
capacity from the market that the Merged Entity would manipulate 
electricity prices. Withholding capacity is an issue in horizontal 
market power, but not in the vertical market power that is of concern 
in this instance. Vertical market power arises here because the Merged 
Entity has the ability to raise the price of electricity by raising the 
price of gas--the dominant margin-setting fuel, and a vertical input to 
electricity. The Merged Entity can profit from gas market manipulation 
if it holds a claim on the net revenues of any infra-marginal plant 
that is operating when gas-fired generation is setting the PX price, 
regardless of whether it controls the plant's output. The plant 
operator, whoever it is, would simply bid into the PX at the plant's 
marginal cost, so that the plant would dispatch when economical. Thus, 
for example, if the Merged Entity enters into a tolling agreement with 
the owners of the two plants it has agreed to divest, its

[[Page 3566]]

financial stake will be essentially identical to what it would have 
been under direct ownership. While physical plant ownership is rightly 
prohibited, the Final Judgment fails to curb the Merged Entity's 
incentives because it allows tolling agreements that give the Merged 
Entity the same profit-making potential.

Management Contracts

    26. The same issues arise with ``management contracts,'' under 
which the Merged Entity would operate a plant owned by a third party, 
typically for a share of the plant's profits. Such arrangements are 
similar to tolling agreements in that they allow the Merged Entity to 
share in a plant's net revenues.
    27. The problem with the proposed Final Judgment is that it does 
not clearly prohibit the Merged Entity from entering into management 
contracts with existing California generating facilities (e.g. its own 
divested generators or those of others). Thus, the Merged Entity could 
sign a management contract for one or more of the plants divested by 
itself or others and enjoy essentially the same financial incentives it 
could have had by retaining its own plants. Moreover, these units under 
management contract need not be gas-fired for them to create price 
manipulation incentives. To perpetuate such incentives, all that is 
required is that the plant(s) under contract be infra-marginal (i.e., 
lower cost than the marginal gas-fired plant that is setting the PX 
price.) To eliminate the anti-competitive incentives associated with 
management contracts, the Merged Entity would have to be explicitly 
prevented from entering into a management contract with any entity 
owning or building generation in California.
    28. The proposed Final Judgement recognizes the problems with 
management contracts when it requires that the Merged Entity notify 
and/or obtain approval from DOJ for management contracts with assets 
owned by California Public Power Providers (``CPPP'') and the Los 
Angeles Department of Water and Power (``LADWP''). These restrictions 
go part way in reducing the Merged Entity's incentives. But since 
similar restrictions are not applied to management contracts involving 
other assets, the Final Judgment gives the appearance of endorsing such 
contracts. Relatedly, the Final Judgment prohibits the ``acquisition'' 
of California Generation Facilities without prior approval. However, by 
carving out exceptions for management contracts, the meaning of 
``acquire'' becomes ambiguous, despite being defined as ``obtaining any 
interest in any electricity generating facilities or capacity''. 
``Acquire'' could be interpreted to prohibit any financial interest 
(which it must do to be effective), or could it be interpreted more 
narrowly to prohibit only ownership interest--which leaves open the 
possibility of management contracts. By explicitly restricting 
management contracts with respect to LADWP and CPPP assets only, the 
proposed Final Judgment appears to endorse a narrow interpretation of 
``acquire'', and threatens to leave the Merged Entity with significant 
incentives to exercise its market power. Such debates concerning 
interpretation mean that at a minimum, in order to enforce the Final 
Judgment the DOJ will have to put itself in a significant oversight 
position to ensure consistency of interpretation and compliance. The 
need for such continuing regulatory activity by the antitrust authority 
would have been eliminated had the Final Judgment imposed a structural 
solution to the market power problem.

 Financial Markets

    29. It is apparent from the proposed Final Judgement that the DOJ 
fails to recognize that financial market contracts (derivatives such as 
forwards, futures, and options) which the Merged Entity may acquire 
could also provide it with incentives to act anti-competitively.\9\ In 
fact, financial contracts can be used to essentially recreate the same 
financial position one would have by virtue of power plant ownership. 
For example, holding a one-year call option for 1,000 MW is financially 
akin to a year's ownership of a 1,000 MW power plant with variable cost 
equal to the ``strike price'' of the call (the contract price paid for 
power if the option is exercised. Such financial market contracts are, 
in effect, ``virtual generation assets.'' \10\ The equivalence between 
financial and physical assets is such that it is now common for 
electric industry planners to treat power plant ownership as equivalent 
to holding a series of call options and/or forward contracts to serve 
future spot markets for power.
---------------------------------------------------------------------------

    \9\ A forward contract for power is simply a non-stardized 
bilateral contact for future delivery at a pre-specified price. 
Futures are standardized forward contracts traded on an organized 
exchange, such as the California-Oregon Border (COB) and Palo Verde 
(PV) electricity futures contracts which are traded on the New York 
Mercantile Exchange (NYMEX) and which are accessible to the 
California market. Options contracts are also derivatives that 
include additional flexibility for either the buyer or seller. For 
example, a call option, a common type of derivative, gives the buyer 
the right but not he obligation to purchase power in the future at a 
specified price.
    \10\ Financial contracts can foster even more anti-competitive 
creativity than power plant ownership, because they are far more 
flexible. For instance, while it is difficult to change one's 
ownership of generating capacity, it is simple to contract for power 
in varying amounts over differing time horizons (a year, a month, a 
week, a day), and to change one's position quickly and frequently. 
This would allow the Merged Entity to tailor its electricity market 
position to make it most advantageous.
---------------------------------------------------------------------------

    30. Consequently, to the extent power plant ownership creates anti-
competitive incentives, so would an equivalent bundle of forward or 
derivative contracts. While the Final Judgment does attempt to restrict 
the future acquisition of existing generating capacity in order to 
prevent anti-competitive behavior, it fails to restrict financial 
market participation, which creates the same incentives to abuse market 
power.

Conclusion

    31. In its Complaint in this matter, the DOJ found that the 
proposed merger of Pacific Enterprises and Enova results in the 
creation of an entity that has the ability and incentive to harm 
competition in the market for wholesale electric power in California. 
The proposed Final Judgment, however, fails to rectify the problem 
because it preserves the ability of the Merged Entity to harm 
competition while imposing remedies that fail to eliminate the 
incentives. In particular, the Final Judgment fails entirely to deal 
with the incentives which the Merged Entity could create through 
ownership of new or repowered generation or contracting for power via 
tolling agreements, management contracts or financial contracts. The 
CIS provides no justification for distinguishing between the 
acquisition of physical assets and financial assets in creating anti-
competitive incentives. The limited restrictions that the proposed 
Final Judgment does place on the future activities of the Merged Entity 
in the areas of new capacity, tolling and energy management contracts 
will not eliminate or even substantially curb the Merged Entity's 
incentives to harm competition.
    32. The proposed Final Judgment does not remedy the serious 
competitive problem identified by the DOJ in its Complaint.

Attachment A--Paul R. Carpenter, Principal

    Dr. Carpenter holds a Ph.D. in applied economics and an M.S. in 
management from the Massachusetts Institute of Technology, and a 
B.A. in economics from Stanford University. He specializes in the 
economics of the natural gas, oil and electric utility

[[Page 3567]]

industries. Dr. Carpenter was a co-founder of Incentives Research, 
Inc. in 1983. Prior to that he was employed by the NASA/Caltech Jet 
Propulsion Laboratory and Putnam, Hayes & Bartlett, and he was a 
post-doctoral fellow at the MIT Center for Energy Policy Research. 
He is currently a Principal of The Brattle Group.

Areas of Expertise

    Dr. Carpenter's areas of expertise include the fields of energy 
economics, regulation, corporate planning, pricing policy, and 
antitrust. His recent engagements have involved:
     Natural Gas and Electric Utility Industries: consulting 
and testimony on nearly all of the economic and regulatory issues 
surrounding the transition of the natural gas and electric power 
industries from strict regulation to greater competition. These 
issues have included stranded investments and contracts, design and 
pricing of unbundled and ancillary services, evaluation of supply, 
demand and price forecasting models, the competitive effects of 
pipeline expansions and performance-based ratemaking. He has 
consulted on the regulatory and competitive structures of the gas 
and electric power industries in the U.S., Canada, the United 
Kingdom, Australia and New Zealand.
     Antiturst: expert testimony in several of the seminal 
cases involving the alleged denial of access to regulated 
facilities; analysis of relevant market and market power issues, 
business justification defenses, and damages.
     Regulation: studies and consultation on alternative 
rate making methodologies for oil and gas pipelines, on ``bypass'' 
of regulated facilities before the U.S. Congress; advice and 
testimony before several state utility commissions and the National 
Energy Board of Canada on new facility certification policy.
     Finance: research on business and financial risks in 
the regulated industries and testimony on risk, cost of capital, and 
capital structure for natural gas pipeline companies in the U.S. and 
Canada.

Professional Affiliations

International Association of Energy Economists
American Bar Association (Antitrust Section)
American Economic Association.

Academic Honors and Fellowships

Stewart Fellowship, 1983
MIT Fellowships, 1981, 1982, 1983
Brooks Master's Thesis Prize (Runner-up), MIT, 1978.

Publications

``Pipeline Pricing to Encourage Efficient Capacity Editions,'' (with 
Frank C. Graves and Matthew P. O'Loughlin), prepared for Columbia 
Gas Transmission Corporation and Columbia Gulf Transmission Company, 
February 1998.
``The Outlook for Imported Natural Gas,'' (with Matthew P. 
O'Loughlin and Gao-Wen Shao), prepared for The INGAA Foundation, 
Inc., July 1997.
``Basic and Enhanced Services for Recourse and Negotiated Rates in 
the Natural Gas Pipeline Industry'' (with Frank C. Graves, Carlos 
Lapuerta, and Matthew P. O'Loughlin), May 29, 1996, prepared for 
Columbia Gas Transmission Corporation, Columbia Gulf Transmission 
Company.
``Estimating the Social Costs of PUHCA Regulation'' (with Frank C. 
Graves), submitted on behalf of Central and South West Corp. to the 
U.S. Securities and Exchange Commission in its Request for Comments 
on the Modernization of Regulation of Public Utility Holding 
Companies, File No. S7-32-94, February 6, 1995.
``Review of the Model Developer's Report, Natural Gas Transmission 
and Distribution Model (NGTDM) of the National Energy Modeling 
System'', December 1994, prepared for U.S. Department of Energy, 
Energy Information Administration and Oak Ridge National Laboratory 
under Subcontract No. 80X-SL220V.
``Pricing of Electricity Network Services to Preserve Network 
Security and Quality of Frequency Under Transmission Access'' (with 
Frank C. Graves, Marija Ilic, and Asef Zobian), response to the 
Federal Energy Regulatory Commission's Request for Comments in its 
Notice of Technical Conference Docket No. RM93-19-000, November 
1993.
``Creating a Secondary Market in Natural Gas Pipeline Capacity 
Rights Under FERC Order No. 636'' (with Frank C. Graves), draft 
December 1992, Incentives Research, Inc.
``Review of the Component Design Report, Natural Gas Annual Flow 
Module, National Energy Modeling System,'' August 1992, prepared for 
the U.S. Department of Energy, Energy Information Administration.
``Unbundling, Pricing, and Comparability of Service on Natural Gas 
Pipeline Networks'' (with Frank C. Graves), November 1991, prepared 
for the Interstate Natural Gas Association of America.
``Review of the Gas Analysis Modeling System (GAMS): Final Report of 
Findings and Recommendations,'' August, 1991, prepared for the U.S. 
Dept. of Energy, Energy Information Administration.
``Estimating the Cost of Switching Rights on Natural Gas Pipelines'' 
(with F.C. Graves and J.A. Read), The Energy Journal, October 1989.
``Demand-Charge GICs Differ from Deficiency-Charge GICs'' (with F.C. 
Graves), Natural Gas, Vol. 6, No. 1, August 1989.
``What Price Unbundling?'' (with F.C. Graves), Natural Gas, Vol. 5 
No. 10, May 1989.
Book Review of Drawing the line on Natural Gas Regulation: The 
Harvard Study on the Future of Natural Gas, Joseph Kalt and Frank 
Schuller eds., in The Energy Journal, April 1988.
``Adapting to Change in Natural Gas Markets'' (with Henry D. Jacoby 
and Arthur W. Wright), in Energy, Markets and Regulation: What Have 
We Learned?, Cambridge: MIT Press, 1987.
Evaluation of the Commercial Potential in Earth and Ocean 
Observation Missions from the Space Station Polar Platform, Prepared 
by Incentives Research for the NASA Jet Propulsion Laboratory under 
Contract No. 957324, May 1986.
An Economic Comparison of Alternative Methods of Regulating Oil 
Pipelines (with Gerald A. Taylor), Prepared by Incentives Research 
for the U.S. Department of Energy, Office of Competition, July 1985.
``The Natural Gas Policy Drama: A Tragedy in Three Acts'' (with 
Arthur W. Wright), MIT Center for Energy Policy Research Working 
Paper No. 84-012WP, October 1984.
Oil Pipeline Rates and Profitability under Williams Opinion 154 
(with Gerald A. Taylor), Prepared by Incentives Research for the 
U.S. Department of Energy, Office of Competition, September 1984.
Natural Gas Pipelines After Field Price Decontrol: A Study of Risk, 
Return and Regulation, Ph.D. Dissertation, Massachusetts Institute 
of Technology, March 1984. Published as a Report to the U.S.
Department of Energy, Office of Oil and Gas Policy, MIT Center for 
Energy Policy Research Technical Report No. 84-004.
The Competitive Origins and Economic Benefits of Kern River Gas 
Transmission, Prepared by Incentives Research, Inc., for Kern River 
Gas Transmission Company, February 1994.
``Field Price Decontrol of Natural Gas, Pipeline Risk and Regulatory 
Policy,'' in Government and Energy Policy Richard L. Itteilag, ed., 
Washington, D.C., June 1983.
``Risk Allocation and Institutional Arrangements in Natural Gas'' 
(with Arthur W. Wright), invited paper presented to the American 
Economic Association Meetings, San Francisco, December 1983.
``Vertical Market Arrangements, Risk-shifting and Natural Gas 
Pipeline Regulations,'' Sloan School of Management Working Paper no. 
1369-82, September 1982 (Revised April 1983).
Natural Gas Pipeline Regulation After Field Price Decontrol (with 
Henry Dr. Jacoby and Arthur W. Wright), prepared for U.S. Department 
of Energy, Office of Oil and Gas Policy, MIT Energy Lab Report No. 
83-013, March 1983.
Book Review of An Economic Analysis of World Energy Problems, by 
Richard L. Gordon, Sloan Management Review, Spring 1982.
``Perspectives on the Government Role in New Technology Development 
and Diffusion'' (with Drew Bottaro), MIT Energy Lab Report No. 81-
041, November 1981.

[[Page 3568]]

International Plan for Photovoltaic Power Systems (co-author), Solar 
Energy Research Institute with the Jet Propulsion Laboratory 
Prepared for the U.S. Department of Energy, August 1979.
Federal Policies for the Widespread Use of Photovoltaic Power 
Systems (contributor), Jet Propulsion Laboratory Report to the U.S. 
Congress DOE/CS-0114, March 24, 1980.
``An Economic Analysis of Residential, Grid-connected Solar 
Photovoltaic Power Systems'' (with Gerald A. Taylor), MIT Energy 
Laboratory Technical Report No. 78-007, May 1978.

Speeches/Presentations

``Opening Remarks from the Chair: Rates, Regulations and Operational 
Realities in the Capacity Market of the Future,'' AIC conference on 
``Gas Pipeline Capacity `97,'' Houston, Texas June 17, 1997.
``Lessons from North America for the British Gas TransCo Pricing 
Regime,'' prepared for AIC conference on: Gas Transportation and 
Transmission Pricing, London, England, October 17, 1996.
``GICs and the Pricing of Gas Supply Reliability,'' California 
Energy Commission Conference on Emerging Competition in California 
Gas Markets, San Diego, Ca. November 9, 1990.
``The New Effects of Regulation and Natural Gas Field Markets: Spot 
Markets, Contracting and Reliability,'' American Economic 
Association Annual Meeting, New York City, December 29, 1988.
``Appropriate Regulation in the Local Marketplace,'' Interregional 
Natural Gas Symposium, Center for Public Policy, University of 
Houston, November 30, 1988.
``Market Forces, Antitrust, and the Future of Regulation of the Gas 
Industry,'' Symposium of the Future of Natural Gas Regulation, 
American Bar Association, Washington D.C., April 21, 1988.
``Valuation of Standby Tariffs for Natural Gas Pipelines,'' Workshop 
on New Methods for Project and Contract Evaluation, MIT Center for 
Energy Policy Research, Cambridge, March 3, 1988.
``Long-term Structure of the Natural Gas Industry,'' National 
Association of Regulatory Utility Commissioners Meeting, Washington 
D.C., March 1, 1988.
``How the U.S. Gas Market Works--or Doesn't Work,'' Ontario Ministry 
of Energy Symposium on Understanding the United States Natural Gas 
Market, Toronto, March 18, 1986.
``The New U.S. Natural Gas Policy: Implications for the Pipeline 
Industry,'' Conference on Mergers and Acquisitions in the Gas 
Pipeline Industry, Executive Enterprises, Houston, February 26-27, 
1986.
Various lectures and seminars on U.S. natural gas industry and 
regulation for graduate energy economics courses at Massachusetts 
Institute of Technology, 1984-96.
Panelist in University of Colorado Law School workshop on state 
regulations of natural gas production, June 1985. (Transcript 
published in University of Colorado Law Review.) ``Oil Pipeline 
Rates after the Williams 154 Decision,'' Executive Enterprises, 
Conference on Oil Pipeline Ratemaking, Houston, June 19-20, 1984.
``Issues in the Regulation of Natural Gas Pipelines,'' California 
Public Utilities Commission Hearings on Natural Gas, San Francisco, 
May 21, 1984.
``The Natural Gas Pipelines in Transition: Evidence From Capital 
Markets'', Pittsburgh Conference on Modeling and Simulation, 
Pittsburgh, April 20, 1984.
``Financial Aspects of Gas Pipeline Regulation,'' Pittsburgh 
Conference on Modeling and Simulation, Pittsburgh, April 19-20, 
1984.
``Natural Gas Pipelines After Field Price Decontrol,'' Presentations 
before Conferences of the International Association of Energy 
Economists, Washington D.C., June 1983, and Denver, November 1982.
``Spot Markets for Natural Gas,'' MIT Center for Energy Policy 
Research Semi-annual Associates Conference, March 1983.
``Pricing Solar Energy Using a System of Planning and Assessment 
Models,'' Presentations to the XXIV International Conference, The 
Institute of Management Science, Honolulu, June 20, 1979.

Testimonial Experience

Antitrust/Federal Court/Arbitration

In the matter of the Arbitration between Western Power Corp. and 
Woodside Petroleum Corp., et al., Perth, Western Australia, May-July 
1998.
In the United States District Court for the District of Montana, 
Butte Division, Paladin Associates, Inc. v. Montana Power Company, 
November-December 1997.
In the United States District Court for the District of Colorado, 
Atlantic Richfield Co. v. Darwin H. Smallwood, Sr., et al., July 
1997.
In the Australian Competition Tribunal, Review of the Trade 
Practices Act Authorizations for the AGL Cooper Basin Natural Gas 
Supply Arrangements, on behalf of the Australian Competition and 
Consumer Commission, February 1997.
In the Southwest Queensland Gas Price Review Arbitration, Adelaide, 
South Australia, May 1996.
In the matter of the Arbitration between Amerada Hess Corp. v. 
Pacific Gas & Electric Co., May 1995.
In re Columbia Gas Transmission Corp., Claims Quantification 
Proceeding in the U.S. Bankruptcy Court for the District of 
Delaware, Before the Claims Mediator, July and November 1993.
Deposition Testimony in Fina Oil & Gas v. Northwest Pipeline Corp. 
and Williams Gas Supply (New Mexico) 1992.
Testimony by Affidavit in James River Corp. v. Northwest Pipeline 
Corp. (Fed. Ct. for Oregon) 1989.
Deposition and Testimony by Affidavit in Merrion Oil and Gas Col, et 
al., v. Northwest Pipeline Corp. (Fed. Ct. for New Mexico) 1989.
Deposition Testimony in Martin Exploration Management Co., et al. v. 
Panhandle Eastern Pipeline Co. (Fed. Ct. for Colorado) 1988 and 
1992.
Trial Testimony in City of Chanute, et al. v. Williams Natural Gas 
(Fed. Ct. for Kansas) 1988.
Deposition Testimony in Sinclair Oil Co. v. Northwest Pipeline Co. 
(Fed. Ct. for Wyoming) 1987.
Deposition and Trial Testimony in State of Illinois v. Panhandle 
Eastern Pipeline Co. (Fed. Ct. for C.D. Ill) 1984-87.

Economic/Regulatory Testimony

Before the National Energy Board of Canada, Application of Alliance 
Pipeline Ltd., Hearing Order GH-3-97, December 1997, April 1998.
Before the California Public Utilities Commission, Pacific 
Enterprises, Enova Corporation, et al. Merger Proceedings, Docket 
A.96-10-038, on behalf of Southern California Edison, August 1997.
In the Superior Court of the State of California for the County of 
Los Angeles, Pacific Pipeline System Inc. v. City of Los Angeles, on 
behalf of Pacific Pipeline System Inc., January 1997.
Before the U.K. Monopolies and Mergers Commission, British Gas 
Transportation and Storage Price Control Review, on behalf of Enron 
Capital and Trade Resources Limited, January 1997.
Northern Border Pipeline Company, Federal Energy Regulatory 
Commission (FERC) Docket No. RP96-45-000, July 1996.
Wisconsin Electric Power Co., Northern States Power Co. Merger 
Proceedings. FERC Docket No. EC 95-16-000, on behalf of Madison Gas 
& Electric Co., Wisconsin Citizens Utility Board and the Wisconsin 
Electric Cooperative Association, May 1996.
Before the California Public Utilities Commission, Application of 
PG&E for Amortization of Interstate Transition Cost Surcharge, 
Application 94-06-044, on behalf of El Paso Natural Gas, December 
1995.
Tennessee Gas Pipeline Company, FERC Docket No. RP95-112-000, on 
behalf of JMC Power Projects, September 1995.
Before the National Energy Board of Canada, Drawdown of Balance of 
Deferred Income Taxes Proceeding, RH-1-95, on behalf of Foothills 
Pipe Lines Ltd., September 1995.
Pacific Gas Transmission, FERC Docket No. RP94-149-000, on behalf of 
El Paso Natural Gas, May 1995.
Before the California Public Utilities Commission, Application of 
Pacific Pipeline System, Inc., A.91-10-013, on behalf of PPSI, April 
1995.
Before the National Energy Board of Canada, Multipipeline Cost of 
Capital Proceeding, RH-2-94, on behalf of Foothills Pipe Lines Ltd., 
November 1994.

[[Page 3569]]

Before the California Public Utilities Commission, Pacific Gas & 
Electric 1992 Operations Reasonableness Review, Application 93-04-
011, on behalf of El Paso Natural Gas, November 1994.
Before the National Energy Board of Canada, Foothills Pipe Lines 
(Alta.) Ltd., Wild Horse Pipeline Project, Order No. GH-4-94, 
October 1994.
Iroquois Gas Transmission System, L.P., FERC Docket No. RP94-72-000, 
on behalf of Masspower and Selkirk Cogen Partners, September 1994.
Tennessee Gas Pipeline Co., FERC Docket No. RP91-203-000, on behalf 
of JMC Power Projects and New England Power Company, February, May 
1994.
Before the California Public Utilities Commission, on the 
Application of Pacific Gas & Electric Company to Establish Interim 
Rates for the PG&E Expansion Project, July 1993.
Before the Florida Public Service Commission, Petition of Florida 
Power Corporation for Order Authorizing A Return on Equity for 
Florida Power's Investment in the SunShine Intrastate and the 
SunShine Interstate Pipelines, FPSC Docket No. 930281-EI, June 4, 
1993.
Before the Florida Public Service Commission, Application for 
Determination of Need for an Intrastate Natural Gas Pipeline by 
SunShine Pipeline Partners, FPSC Docket No. 920807-GP, April-May 
1993.
Northwest Pipeline Corp., et al., FERC Docket No. IN90-1-001, 
February 1993.
City of Long Beach, Calif., vs. Unocal California Pipeline Co., 
before the California Public Utilities Commission, Case No. 91-12-
028, February 1993.
Alberta Energy Resources Conservation Board, on Applications of NOVA 
Corporation of Canada to Construct Facilities, January 1993.
Before the California Public Utilities Commission, on the 
Application of Pacific Gas & Electric Co. to guarantee certain 
financing arrangements of Pacific Gas Transmission Co. not to exceed 
$751 million, 1992.
Mississippi River Transmission Co., FERC Docket No. RP93-4-000, 
October 1992, September 1993.
Unocal California Pipeline Co., FERC Docket No. IS92-18-000, August 
1992.
Before the California Public Utilities Commission, in the Rulemaking 
into natural gas procurement and system reliability issues, R.88-08-
018, June 1992.
Alberta Energy Resources Conservation Board, Altamont & PGT Pipeline 
Projects, Proceeding 911586, March 1992.
Before the California Utilities Commission, on the Application of 
Southern California Gas Company for approval of capital investment 
in facilities to permit interconnection with the Kern River/Mojave 
pipeline, A.90-11-035, May 1992.
Northern Natural Gas, FERC Docket No. RP92-1-000, October 1991.
Florida Gas Transmission, FERC Docket No. RP91-1-187-000 and CP91-
2448-000, July 1991.
Tarpon Transmission, FERC Docket No. RP84-82-004, January 1991.
Before the California Public Utilities Commission, on the 
Application of Pacific Gas & Electric Co. to Expand its Natural Gas 
Pipeline System, A. 89-04-033, May 1990 and October 1991.
CNG Transmission, FERC Docket No. RP88-211, March 1990.
Panhandle Eastern Pipeline, FERC Docket No. RP88-262, March 1990.
Mississippi River Transmission, FERC Docket No. RP89-249, October 
1989, September 1990.
Tennessee Gas Pipeline, FERC Docket No. CP89-470, June 1989.
Empire State Pipeline, Case No. 88-T-132 before the New York Public 
Service Commission, May 1989.
Before the U.S. Congress, House of Representatives, Committee on 
Energy and Commerce, Subcommittee on Energy and Power, Hearings on 
``Bypass'' Legislation, May 1988.
Tennessee Gas Pipeline, FERC Docket No. RP86-119, 1986-87.
Mojave Pipeline Co., FERC Docket No. CP85-437, 1987-88.
Consolidated Gas Transmission Corp., FERC Docket No. RP88-10, 1988.
Panhandle Eastern, FERC Docket No. RP85-194, 1985.
On behalf of the Natural Gas Supply Association in FERC Rulemaking 
Docket No. RM85-1, 1985-86.
On behalf of the Panhandle Eastern Pipeline Co. in FERC Rulemaking 
Docket No. RM85-1, 1985.

BILLING CODE 7515-01--P

[[Page 3570]]

[GRAPHIC] [TIFF OMITTED] TN22JA99.002



BILLING CODE 4410-11-C

[[Page 3571]]

Attachment B--1996 WSCC Electric Supply Curve (Notes and Sources)

Sources

    Electric Supply and Demand Database (NERC); RDI 1996 Fuel Price 
Forecast.

Notes

    For graphical clarity, units with dispatch cost above $60/MWh 
are excluded (30 oil-fired turbines, 740 MW total capacity). 
Nameplate capacity has been derated to reflect approximate average 
annual availability; hydro derated to reflect available energy.
    The WSCC is the electric reliability council consisting of 11 
western states and portions of Canada and Mexico; it contains 
162,000 MW of generating capacity from over 1,400 generating units.
    The annual average WSCC load is approximately 82,000 MW, and one 
standard deviation of coincident load is approximately 11,500 MW, so 
a one-standard deviation band around average load encompasses the 
range from 70,500 MW to 93,500 MW. Actual values fall within one 
standard-deviation of the average approximately two-thirds of the 
time.
    Note that this is an ``average annual'' supply curve, in that 
nameplace capacity of units has been derated to reflect average 
annual availability (annual energy limits for hydro). Some care must 
be taken in interpreting this curve, because at any particular point 
in time, the actual supply curve will differ somewhat, depending on 
which particular units are actually available at that time. However, 
it clearly demonstrates that gas, and particularly California gas, 
is the dominant fuel of the price-setting marginal units in the 
entire WSCC. Of course, the effect of California gas-fired capacity 
on just the California market is even greater.

Affidavit of Paul R. Carpenter, Ph.D.

Commonwealth of Massachusetts, County of Middlesex
ss

    I, Paul R. Carpenter, being first duly sworn on oath depose and 
say as follows:
    I make this affidavit for the purpose of adopting as my sworn 
testimony in this proceeding the attached material entitled 
``Affidavit of Paul R. Carpenter, Ph.D.'' The statements contained 
therein were prepared by me or under my direction and are true and 
correct to the best of my knowledge, information, and belief.
    Further affiant saith not.
Paul R. Carpenter

    Subscribed and sworn to before me, a notary public in and for 
the Commonwealth of Massachusetts, County of Middlesex, this 4th day 
of August, 1998.
[SIGNATURE ILLEGIBLE].

[FR Doc. 99-1393 Filed 1-21-99; 8:45 am]
BILLING CODE 4410-11-M