FTC Defers to State Resolution of Competitive Concerns Arising Out of Acquisition of Natural Gas Assets
Friday, November 16, 2012
On November 7, 2012, the Federal Trade Commission announced it had closed its investigation of Hilcorp Alaska LLC's proposed $375M acquisition of Marathon Oil Company's Cook Inlet, Alaska natural gas production, storage, and pipeline assets, despite identifying several competitive concerns with the transaction. The FTC explained in a written statement that this unusual move was based upon the "unique circumstances" of the case, specifically, that the effects of the proposed acquisition are confined solely to consumers in Alaska and that the State of Alaska has negotiated a consent decree that the State believes alleviates the competitive concerns arising from the transaction and mitigates the State's energy security concerns.
Natural gas produced in the Cook Inlet supplies south-central Alaska with the natural gas needed for electric power generation, space heating, and industrial use. Because Marathon and Hilcorp are two of the three primary competitors for sales of natural gas in south-central Alaska, which account for over 90 percent of the natural gas produced in Cook Inlet, both the FTC and the State of Alaska expressed concern that the proposed transaction would harm competition by diminishing the negotiating strength of the area's primary purchasers – local utilities and industrial users. The FTC also identified competitive concerns with the post-merger Hilcorp because it would control all of the proprietary gas storage capacity in south-central Alaska and the majority of pipeline infrastructure needed to deliver gas from the fields to customers, which potentially could hinder efforts by other companies in the area to increase natural gas production.
In its consent decree filed in Alaska Superior Court, the State of Alaska Attorney General noted that although the proposed transaction presented competitive concerns, it could also alleviate existing concerns regarding energy security and local energy supply shortages. Existing fields in Cook Inlet are declining in production, and local utility demand is expected to exceed annual production within a few years. Given the current state of the market and the expected shortages, the State has been actively working to incentivize and encourage new investment in exploration and production in the Cook Inlet.
The consent decree negotiated with Hilcorp requires that it abide by the following conditions: (1) price caps on natural gas sold to local utilities and industrial users for the next five years (with an escalator allowing a 4 percent annual increase); (2) a prohibition on selling Cook Inlet natural gas for LNG export for five years; and (3) it will not knowingly sell Cook Inlet natural gas to other companies who intend to resell the gas for LNG export. According to the Alaska Attorney General, the consent decree properly balances the need for pricing protection for consumers to address the competitive concerns against the importance of encouraging new investment in exploration and development of the Cook Inlet natural gas resources.
This transaction is noteworthy in several respects. It demonstrates that both the federal government and state attorneys general are taking an active role in reviewing acquisitions that may impact a state's energy resources. However, it is uncommon for a federal antitrust agency to defer to state resolution of a matter in which the federal agency identified real competitive concerns, as the FTC did in this case, even where the situation presents unusual circumstances. This is especially true where, as in this transaction, the resolution included a conduct remedy, as the FTC typically does not favor conduct remedies, preferring instead structural remedies (such as asset divestitures) to resolve competitive concerns. This case therefore shows a willingness by federal antitrust regulators to acknowledge, and even give priority to, state concerns in certain cases, at least where the competitive effects are limited to the state.
Daniel Hemli advises clients on antitrust issues relating to mergers, acquisitions and joint ventures, and advocacy before federal, state and foreign antitrust authorities. He has represented parties in connection with investigations of numerous national and multinational acquisitions and joint venture transactions across a broad range of industries, including oil and gas, electric power, pharmaceuticals, medical devices, technology and software, chemicals, financial services, commercial and industrial equipment, consumer goods, media, and agriculture. He has advised on...
Jacqueline (Jackie) Java focuses her practice on antitrust counseling. She advises clients involved in transactions and day-to-day operations that raise antitrust issues regarding interactions among competitors, the formation of joint ventures, distribution and pricing policies and programs, information exchanges, and allegations of price fixing, market allocation, and other anticompetitive practices. She is particularly experienced in managing complex relationships in industries where companies simultaneously act as competitors, customers and collaborators.
Ms. Java has served as antitrust counsel for numerous transactions, and is experienced in all antitrust aspects of mergers and acquisitions, from initial antitrust analyses and the preparation of Hart-Scott-Rodino filings, through government investigations and Second Requests. She also has assisted with filings required by foreign antitrust authorities. Ms. Java has counseled many clients on the antitrust pitfalls associated with due diligence and integration planning in connection with mergers, particularly where the parties operate in highly concentrated industries. She also has represented clients in Federal Trade Commission, Department of Justice and other federal regulatory authority investigations into allegedly anticompetitive activities.