UNITED STATES v. EL PASO GAS CO.

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Argument of Archibald Cox

Chief Justice Earl Warren: Number 94, United States, Appellant, versus El Paso Natural Gas Company, et al.

Mr. Solicitor General.

Mr. Archibald Cox: Mr. Chief Justice, may it please the Court.

This is a major antitrust case in which the Government attacks the merger of two natural gas pipeline companies under Section 7 of the Clayton Act.

The acquiring company is El Paso Natural Gas Company, which at the time of the acquisition was one of the two largest natural gas companies in the country and which was then the only company actually supplying natural gas -- interstate natural gas to California.

The acquired company is Pacific Northwest Pipeline Company, then the only large interstate natural gas company west of the Rocky Mountains and a company which was seeking to enter the California market.

Another aspect of the litigation growing out of this merger was here two years ago when the Court held that set aside in order of the Federal Power Commission, on the ground that it should not have preceded to approve the merger while an antitrust complaint was being prosecuted by the Department of Justice in the District Court.

The question presented here is whether the acquisition itself violates Section 7 of the Clayton Act because it was an acquisition which may tend substantially to lessen competition in the -- in promoting projects for the sale of natural gas to California.

The essential facts, at least the outline of the facts is really quite simple.

We start with the California market for natural gas which was an -- an immense and very rapidly expanding market.

In 1950 for example, six years before the merger, the consumption was 684 million cubic feet daily.

In 1955, it was one billion cubic feet daily.

In 1960, 1.3 billion, in 1965, it's estimated it'll be 1.6 billion and in 1970, two billion cubic feet daily.

It's increasing in other words at an annual rate of approximately 200 million cubic feet a day, much the most dynamic as I understand it in the country.

More than half of California's consumption comes from out-of-state.

It's been 50%, 61% and it can be expected in all probability, but with no certainty to continue to be more than half.

Natural gas is a principal source of energy, it being dependent on interstate pipelines.

California's concern that it should not receive all its gas from one company or that it should be dependent even on one or two suppliers, is a very natural one.

It's one that's been often expressed, the Federal Power Commission and expressed here before this Court.

El Paso, at the time of the merger, was, as I have said, one of the largest natural gas pipeline companies in the country in --at assets of just under a billion dollars, 903 million.

Its pipelines are shown on this separate map that I asked the clerk to distribute only because it was a convenient way of showing where these two companies run.

I think, if anyone started looking in some of the details, he might be misled, and all I'm trying to do is show the main outlines.

El Paso, you'll see, is marked in red.

Its pipelines run from the San Juan Basin, a natural gas basin in Southwest in Colorado and Northwest in New Mexico, the Texas Panhandle and the Permian Basin in West Texas, out to the California border.

At the California border, the gas is picked up either by Pacific Gas and Electric Company which is a distribution company that has virtually a monopoly of the distribution of gas in Northern California or by what are known as the Southern Companies, two affiliated companies which have virtually a monopoly of the distribution of gas in Southern California.

Pacific Northwest was incorporated in 1959 and was certificated in 1954, initially with a view to serving the Northwestern states, Washington, Oregon, Idaho, Utah.

Its pipeline, you will see, is marked in blue.

It runs from a connection with Canadian companies at the border at Sumas, Washington down paralleling the western edge of the Rocky Mountains, down to the San Juan Basin.

Pacific Northwest had four assets or advantages that are worthy of note.

In the first place, it was unique, I think, and that it had access both to the Canadian Gas which was becoming of increasing importance and to the San Juan Basin, another important source of gas.

It lay adjacent to the Rocky Mountains and therefore adjacent to important future reserves of gas, which were then beginning to be developed.

Having gas fields in either end, this was a flexible line, the line could be -- the gas could be made to flow in either direction or from the two ends to some point in the center where it might be carried off by a bridge line.

And finally, I would point out that as these things go, while Pacific Northwest had no line to California, it was not far from the California market.

I should say in that connection, to avoid any possible confusion that these two little orange lines going off from Pacific Northwest, one running south through Oregon and the other running across to Nevada, ought to be disregarded.

They are little bitsy pipelines and they have no earthly importance in this proceeding or is a possible bridges from Pacific to California.

And if we'd had some convenient way to eliminate them, I'd have stricken them right off the map.

Almost from the time of its incorporation and certainly from the time of its certification, Pacific had a very real interest in the California market.

In 1954, it engaged in discussions with Pacific Gas and Electric, with the view to bring down a supply of gas from Canada.

Later that year, those preliminary conversations gave way to an agreement between Pacific, El Paso, and the Canadian company, Westcoast Transmission Company, to impart 300 million cubic feet a day through Mountain Home, Idaho which would be a point about halfway on Pacific's Line through Idaho and then to bring that gas down probably through Reno to California.

Again I say the orange line has nothing to do that -- with that although it's about the location.

That agreement was described by one of Pacific's officers in a report to a stockholder as having this effect.

El Paso's California market will be protected against future competition.

And if the agreement results in all parties now working together for a common end rather than fighting each other.

This was only a plan.

The agreement had been signed but it was felt through because the distribution companies refused to take the gas at the point at which the transmission companies wanted to lever -- to deliver it to California.

Then in 1956, as I shall describe in more detail later, Pacific negotiated with Southern California Edison, a large user of gas and reached a tentative agreement on July 30, 1956 to impart gas to California, building a pipeline, provided that a -- another purchaser along with Edison could be found.

Justice Potter Stewart: When was the earlier plan abandoned?

1955?

Mr. Archibald Cox: 1954 -- there was a --

Justice Potter Stewart: 1954 --

Mr. Archibald Cox: -- very preliminary discussions in 1954, then there's 1954, a three-way deal.

I think it fell through during 1954.

Justice Potter Stewart: And does the record show why it fell through?

I suppose (Voice Overlap) --

Mr. Archibald Cox: It fell through because the Southern Companies wouldn't take it at the point of delivery that El Paso wanted to deliver it, having brought it down through Westcoast Transmission in part of Pacific's line.

They wanted to deliver it farther north than they would take it.

It fell through in 1955.

It would've been before these discussions with Edison.

As I say, I shall refer to the discussions with Edison at more length in the course of my argument.

It's worth noting that when the president of El Paso learned of the negotiations between the Pacific and Edison, he went to Edison, told Edison that he knew about the negotiations, that he wanted to hold the market there in Southern California which he had all up at that time, and was prepared to supply it, and that he would resist the efforts of anybody else to come in.

Justice William J. Brennan: (Inaudible) it's talking about now, is that something else?

Mr. Archibald Cox: I'll come to that in a minute.

I haven't mentioned that yet.

Justice William J. Brennan: Is that the one that deals with (Voice Overlap) --

Mr. Archibald Cox: That's still another proposal that involved the perspective use of Canadian gas.

Justice William J. Brennan: But I thought -- I think you said that the Edison transaction would've required the construction of a pipeline?

Mr. Archibald Cox: Yes.

Justice William J. Brennan: I see.

Mr. Archibald Cox: Yes.

In fact all that I have mentioned would have required the construction of a line taking off somewhere from Pacific's line to California.

I'll explain that more length in a few minutes.

El Paso's interest in acquiring Pacific and indeed its negotiations to acquire Pacific commenced almost as soon as Pacific had a certificate to build this pipeline.

El Paso made studies in 1955 and in December 1955, it made an offer to acquire all of Pacific's stock, giving five of each share for every nine of Pacific's.

That offer was rejected.

In 1956, while Pacific was negotiating with Edison, El Paso picked up and Pacific picked up the previous negotiations for a merger.

On November 8, 1956, an agreement was closed whereby El Paso was to surrender seven of each gift -- seven of each shares for every eight shares of Pacific.

That agreement was complete -- well, it was completed on that date.

It was carried out during the ensuing months.

By May 1957, El Paso had acquired 99 and a fraction percent of the stock of Pacific.

In July 1957, the Department of Justice started this suit against El Paso, complaining that the merger violated Section 7 and seeking ultimately an order requiring El Paso to divest itself from the stock.

El Paso then decided to acquire all the assets of Pacific.

The theory, I take it, was that while the stock acquisition did not require the approval of a -- the Federal Power Commission, an asset acquisition would require its approval and then approval in turn, the lawyer's thought, would result in immunizing the acquisition under the Clayton Act.

The Federal Power Commission did approve the acquisition.

The order was then brought here by the State of California and this Court set -- assigned the order of the Federal Power Commission holding first that the Federal Power Commission should not have proceeded while the antitrust case was pending.

And also holding squarely, that Federal Power Commission approval of an asset acquisition does not give any immunity under the antitrust laws, so that the order was wiped out and the way was cleared for trial in the District Court in this case.

Now, the two or three events that occurred after the merger, that I think it would be convenient to explain at this point because we will be referring to them in the course of the argument.

One, Mr. Justice Brennan, relates to this dotted line that you mentioned earlier.

That represents what was known as the Rock Springs project.

That was a project developed by El Paso after the merger for bringing gas from a number of sources into California to meet an expected increment in the California demand.

Some of the gas that would have been used in that project would have come from Canada through Pacific's pipelines, but not all of it.

Some of it was clearly dependent upon that gas that El Paso would have provided from sources not available to Pacific, but some of it was also Canadian gas and I shall argue --

Justice Potter Stewart: I thought you told us that was disapproved by the Federal Power Commission at Rock Springs?

Mr. Archibald Cox: If I hadn't, I was going to say it in the next sentence.

Justice Potter Stewart: Well, you sent a letter to us last spring or summer.

Mr. Archibald Cox: It was.

Justice Potter Stewart: Yes.

Mr. Archibald Cox: No question about it.

Justice Potter Stewart: Yes.

I -- I misunderstood you.

Mr. Archibald Cox: I'm -- I'm just saying this --

Justice Potter Stewart: It was going to be that.

This was planned (Voice Overlap) --

Mr. Archibald Cox: No, these are mostly planned.

Justice Potter Stewart: Yes.

Mr. Archibald Cox: No question about that.

This has never been -- has been disapproved.

It's in a sense perhaps openness and alternative because it was held over to be considered if El Paso cared to resubmit it, along with several other alternate applications for certifications, but it's not been built.

The other events that I want to mention are the entry of one pipeline into California and an effort by another to get in.

Transwestern Pipeline Company, since the merger has built a line.

If you look at the northern division of El Paso and find the little black number 97, you will see its line which roughly parallels El Paso's normal division.

That is a line that carries gas to the Southern Companies at the California boarder and indeed it has a good deal of excess capacity.

Unknown Speaker: (Inaudible)

Mr. Archibald Cox: No, that's not an El Paso Company.

That's an independent company and one which Mr. Harrison will argue, introduces no end of competition into the market.

We have our doubts but it's there as a company and it's an independent company.

In addition, there has been proposed and will be ruled upon by the Federal Power Commission some time in the not too distant future, Justice Stewart, another application by Gulf Pacific, which wishes to build a pipeline across the southwest, the exact route is immaterial, carrying gas to Southern California.

So that those are events that occurred after the merging that were entered, that it was -- were proved at the hearing in the District Court.

After the case went back, the District Court received evidence, some oral, parts of it from the record in these previous proceedings.

And after hearing argument announced for the bench that he would rule against the prosecution that there was no violation of Section 7, directed the defendant to prepare findings of fact of conclusion which I understand were submitted -- were signed as the defendant submitted them and then we brought the case here.

The question presented as we see it is solely one of law.

We do not attack any I think, certainly not more than one of the findings as unsupported by the evidence.

We argue that a number of the conclusions rest on a misconception of the principles governing the application of Section 7.

We argue that a number of the other findings as I shall explain are irrelevant because they missed the essential point because of an error of law.

But we do not seek to go back of what is undisputed evidence.

Our case rests essentially on two propositions.

First, we say that competition in the pipeline industry consists of rivalry in promoting future projects to transport and deliver large quantities of gas for a long period, 20 years or more on the average often through facilities to be constructed and beginning some time in the future, two, three and perhaps as far away as five years.

In other words, this isn't simply the sale of units of gas today to be delivered tomorrow.

It looks to long-term projects to bring gas to a market.

Second, bearing in mind the nature of competition, we submit that El Paso's acquisition of what was then the only major pipeline company west of the Rocky and seeking to enter the California market, a company which was actively seeking to enter the California market made such a change in the structure of the market, as to require as a matter of law the conclusion that it would tend substantially to lessen competition.

Let me first say just a word more about the nature of competition in this industry.

As I say, what we think it consist of and I don't think that the defendants, the appellees disagree, is the promotion of rival projects among producers, one end of the bridge and among users or distributing companies at the other ends of the bridge, to put together links bringing the necessary gas to the market, and then to secure the approval of the Federal Power Commission.

It's quite different from competition in the sale of shoes to shoe stores located in the same neighborhood are engaged in selling shoes that they have in stock, the costumers now for delivering either immediately or in a very short time in the future.

Even shoe manufacturers, while they are selling next season's supply to the retailer still are selling shoes which are either manufactured or very shortly to be manufactured, they're to be delivered, a few lots.

They're not engaged in competition that constructs and operate shoe factories over a long period of years.

Here, the gas sold today is not sold in competition.

It wouldn't be sold in competition even if there were 10 pipelines leading into California.

The gas that El Paso is delivering today is earmarked by Federal Power Commission certificate to come from a particular source.

It will go through a certificated pipeline that will be delivered to a particular distributor or possibly a user, and its use will frequently have been marked by the certificate itself.

The rivalry therefore comes in these vast projects for the future, things like the Rock Springs Project where there was real rivalry even though it was ultimately disapproved.

The rivalry is in buying or acquiring large quantities of gas in the producing areas.

Rivalry in selling is in selling long term arrangements to the distribution companies or possibly to the users.

There's rivalry in planning alternate transmission lines, it -- but it bring linking different sources of supply with different markets.

The long range impact of that may have considerable significance to the purchaser.

Nor thus a competition end as we visualize it when the contract is signed because there is still rivalry in submitting the proposals to the regulatory agencies.

Indeed, one of the things that seems to us in -- of critical importance in applying the policy of the antitrust laws to this kind of industry is that the regulatory agencies should have a number of alternatives available so that they can choose between Project A and Project B or Project A, B, C and D and should not be limited only to what one company puts forward.

And it's that fillings I suggested before I think that indicates the interest to the State of California in this case.

The nature of competition in this industry has -- carries three important consequences.

In the first place, it means that competition is likely to be episodic.

As the market builds up an additional increment of unfilled demand large enough to warrant the expansion of pipeline facilities or in a dynamic market like this usually the construction of new facilities, then there will be a period of competition.

There was such a flurry in 1955 and 1956.

Today, there is intense rivalry looking to the increment of demand which will have to be satisfied beginning after 1968.

And it's saying that I suggest the second consequence and that is that we are dealing with the long term future, not with tomorrow, next week, even next year.

But we're dealing with 20-year contracts to be executed in the future.

We're concerned with the structure of the market in the 1970s, 1980s, and beyond.

And the third consequence is that it really doesn't make much difference but certainly it is not decisive whether a pipeline company is currently selling gas or has an existing pipeline into the market.

As I say that, we submit, is clearly not decisive and I can best illustrate this by referring to the situation that has developed since the merger in the southwest.

Today, there is intense rivalry between El Paso, Transwestern, and Gulf Pacific.

The El Paso and the two new companies I mentioned earlier, for the increment of demand expected after 1968.

Transwestern is the only one who has any substantial unused capacity in its pipeline.

Gulf Pacific would build a new line.

El Paso would have to build a new line or greatly add to it's -- the capacity of its existing facility but yet there's no question but that those three concerns are now competing for that next increment of gas.

I don't want to exaggerate this point.

Obviously Algonquin that carries gas into Boston is not a competitive factor in the California market.

The location of the company, its resources, its access to supply, its relation to the market are all do -- all are important in determining whether it's a competitive factor.

The only point I'm seeking to emphasize is that the fact there is no bridge from Pacific's line to California and that Pacific has never actually delivered any gas in California, does not show that it is not a competitive factor.

Now against that background, I come to the critical question, was Pacific such an independent competitive factor for future projects to the California market that its acquisition by El Paso may tend substantially to lessen competition?

Here, we're concerned, I think, primarily with the structure of the market as the Court emphasized in Brown Shoe and in the Philadelphia Bank case.

The legislative history shows beyond the doubt of what Congress was concerned within Section 7 was barring chip -- was to nip in the bud monopoly and other restraints of competition by barring those changes in the structure of the market that generally result in a lessening of competition.

Taking this case then in its simplest terms what it seems to come down to is this.

The largest pipeline company in the country, the only actual supplier of gas to California has acquired the only other company which was a pipeline in being west of the Rockies and which was at the time of the acquisition seeking to enter the California market.

Pacific was a going enterprise.

It was interested in the market.

It tapped areas of production which would be increasingly important to California on the face of it.

Swallowing up by El Paso, one of its few natural rivals would seem substantially to lessen competition.

Now, while those seem to be the essential elements, our case of course goes far beyond that.

First, the undisputed evidence shows, we think, that just prior to the merger, Pacific was engaged in active competition with El Paso.

And remember that Pacific's life was short so that even one instance of rivalry in this business would be very important.

Let me describe it in a little detail.

In 1955 and 1956, one of the major new increments of demand in Southern California was the need of Southern California Edison for a permanent supply of natural gas with which to fire its steam boilers for generating electricity in place of oil which was under much criticism as a matter of smog control.

Up to that point, Edison had secured an interruptible supply from the Southern Company.

Interruptible because whenever the Southern Companies needed the gas to -- for domestic users or others, they'd take it away from Edison and Edison would have to convert it over to firing its boilers with oil.

The Southern Companies had been unwilling to commit a -- to make a commitment for furnishing Edison a steady supply for a long term for a block of gas.

In January 1956, Edison which apparently felt this problem increasingly keenly went to Edi -- went to El Paso and as to El Paso, to make a direct sale of gas to it.

And El Paso refused to make the direct sale saying that, "You are a customer of our customer, the Southern Companies and therefore, we won't deal with you, go and speak to them."

In May therefore, Edison turn to Pacific Northwest and they began to talk about a plan for bringing in 300 million cubic feet of gas daily.

In June, that's only a month later, either because they were cause in effect or by coincidence, and I cannot say which, the Southern Companies suddenly did offer a firm supply of 300 million cubic feet of gas to Edison.

But that offer have to be withdrawn because Southern found that the gas wasn't available at the time Edison began to press the negotiation.

By July 30, Edison and Pacific Northwest had entered into a tentative agreement under which Edison -- under which Pacific would bring in from Canada 300 million cubic feet of gas daily which Edison would take 100 and up to 150 million cubic feet a days -- of gas daily.

Now this agreement was -- was tentative, necessarily so because you have to have some market for the whole 300 million in order to make it a financial -- financially feasible to build the pipelines.

But Edison and Pacific were pushing ahead with their plan.

Pacific was to deal with getting the supply and Edison was to approach the local distribution companies with a view to getting them to agree to take some of it.

PG&E brushed it off very quickly but the Southern Companies expressed interest and asked for further details.

On August 24, let's just say it was about three weeks after the tentative agreement was signed, Kayser, the president of El Paso, went to call on Quentin who is the officer of Edison handling this promotion or deal or the transaction, if you will.

Kayser told Quentin that he wanted to hold the market there in Southern California.

In fact, in a memorandum, Quentin said that Kayser had said he was prepared to fight for the last -- to the last ditch.

But Quentin testified that Kayser said, he wanted to hold the market there in Southern California and was prepared to supply it and that he would resist the efforts of anybody else, and he was referring to Pacific to come in there.

And then Kayser made an oral offer of a direct sale of 150 million cubic feet from El Paso to Edison with the Southern Companies to get a fee for transporting.

And my friend says in his brief that that statement is contrary to the record.

But I think if you will look at the letter which Mr. Keyser thereafter wrote to Quentin, I won't take time to read it now but we refer to it in our brief that he describes how he had formerly refused to make a direct sale, how the Southern Companies have changed their policy and how he was now offering a direct sale.

So that it seems to me it's quite clear that he was aware of the competition and by inference that the rivalry brought about a change in Southern Companies' conduct and El Paso's conduct.

Now in the end, this proposal failed through because the Southern Companies decided that they could bring in gas more economically through what they called their existing pattern of supply, in other words, through El Paso.

But I submit that the failure cannot obscure either the fact of competition at that time or the likelihood that an independent Pacific would resume or continue this kind of effort.

Indeed, if one thinks suppose the acquisition had come on August 26 while the dickering was still going forward before the Southern Companies had said no, would seem to me no one would say that substantial competition, the chance of substantial competition haven't been less.

Well, in terms of this market in the long term future, the dif -- the difference between an acquisition in October and an acquisition in August surely is immaterial.

In addition, we submit that the undisputed facts show a probability that Edison's competitive activity wouldve continued and that we're not left simply to draw an inference from the instance that I have described.

I've already mentioned California is insatiable market, growing at the rate of 200 million cubic feet a day.

It's quite apparent that the Canadian and Rocky Mountain supplies would in the long term future become more and more impartment to California as the gas -- Texas gas and the Permian Basin Gas was either used or committed to other areas.

It seems inevitable that Pacific would have continued its effort to link them.

There, it was hooked to both those fields very favorably located with only the need of a bridge in the California and with Pacific under the pressure of finding new markets because it's very badly needed new markets.

The opportunity, I think, is further approved by the fact that four major projects, while never completed, were seriously talked about in this short five-year period.

There was the agree -- there was a series of agreements that I mentioned earlier in 1954 and 1955 involving Westcoast Transmission.

There was the agreement with Edison that I just finished talking about.

El Paso after it acquired Pacific Northwest had two projects that involved bringing down some Canadian gas that in one instance mixing it with very substantial quantities of other gas and so taking it to the California market.

One of those -- one of run for Twin Falls, Idaho down to Las Vegas, the other was the Rock Springs project that we mentioned earlier.

So there are four things that people seriously considered investing time and money and what I suggest is that they show that the likelihood of this kind of promotional activity was a reality.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Archibald Cox: Well, I think El Paso wanted gas to serve its own market unquestionably.

All I'm suggesting is that instead of the gas coming from El Paso and El Paso deciding where to bring it from that there would have been an independent presence also seeking to fill that market.

And to --

Justice Arthur J. Goldberg: (Inaudible)

Mr. Archibald Cox: Well, I can't --

Justice Arthur J. Goldberg: (Inaudible)

Mr. Archibald Cox: I think it is based upon something between conjectures and probabilities.

It -- it's certainly is not -- I don't think it can be said in fairness that any of these things wouldve happened and indeed the District Court found that they wouldn't.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Archibald Cox: But what I do say, Mr. Justice, essentially is that it is improper in applying Section 7 to speculate about what would be the outcome of competition.

If two horses are matched in a steeplechase and one of them is scratched, you don't say, "Oh, there would have been no competition because I find that the remaining horse would have won the race anyway."

And that I think is essentially our proposition here.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Archibald Cox: It never -- I think the Court had never found that Pacific would not have tried to promote projects to California.

It did find of course that it would not have succeeded.

It finds if I might address myself to the findings in a little more detail.

And I think it's easiest to work back through them on page 66 in findings of 100 to 103, of course the Court recites the ultimate conclusions that Pacific -- there is no evidence that Pacific had a substantial likelihood of prevailing and a reasonable likelihood of providing any substantial competition.

And then it goes on in the next three findings saying the same thing.

Now, those we think are simply legal conclusions that the real meaning of that finding is to be found in the preceding of half dozen findings beginning with finding 94 and running through 99.

In 94th, take it as an example, the Court -- the Court found that financial condition of Pacific Northwest through a such that it is improbable that it could have succeeded in selling natural gas at that time in the California market.

But there's a prediction of what would've happened in the horse race, not a prediction of whether Pacific would've run a good race.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Archibald Cox: I -- I don't think I'm -- I'm not making any prediction.

I'm arguing that we should not engage in making this prediction.

That the basic theory of the antitrust law is that who gets the deal, who is successful, who wins the race is to be determined through the competitive process.

And it seems to me that that is very -- a very important and sound principle, the implicit in all our antitrust policy for at least two reasons.

The first one is that this is not something that lends itself to a judicial inquiry as to which company will be the more successful.

You could take evidence on it back and forth and still never know for sure.

The second reason and perhaps the more important reason is that the presence of an independent rival, even if the rival isn't going to win, sets very definite limits on the conduct of the other firm.

(Voice Overlap)

Justice Potter Stewart: Yes.

Mr. Solicitor General, your horse race is a very picturesque analogy and --

Mr. Archibald Cox: I was hoping you would say (Inaudible).

Justice Potter Stewart: Well, no, I wonder if it is because as I read the District Court's findings, he finds that -- that Pacific wasn't even going to get on the track, wasn't going to be in the race.

Mr. Archibald Cox: But --

Justice Potter Stewart: Wasn't going to be racing, wasn't going to be competing.

Mr. Archibald Cox: I don't -- I don't think that that can be the proper interpretation of it.

If it is, then I would simply -- then I would have to say that we attack the findings and -- and say that they are contrary to the undisputed evidence.

But I don't think, Mr. Justice Stewart, that that is a proper interpretation of the findings.

Take 94 for an example.

All he says is the financial condition of Pacific Northwest was such that it was improbable that it could have succeeded in selling natural gas at any time in the California market.

That surely is a guess as to whether it could have finished the race and not anything more.

And take -- take over on page 66 as another illustration finding 99.

There, the Court finds there is no evidence to Pacific Northwest that it remained as a separate and independent entity, could have put together an interstate natural gas project to serve California acceptable to the Federal Power Commission and the California Public Utilities Commission.

Now, clearly the function of the Court in dealing with a business like this is not to predict what the regulatory agency will do or what it will approve or won't approve.

Indeed, the importance of competition here is that there'd be alternatives open to the regulatory agency so that they aren't dependent on just one company.

I think I can illustrate that point very clearly by taking the situation in California since the merger.

First, we had El Paso put forward the Rock Springs project and pressed it very hard for a number of years, I guess, it came close to getting approval.

The other companies, Transwestern and the Gulf Pacific interest were opposing Rock Springs, because it rivaled them.

Now, there's to be a comparative proceeding between El Paso, a somewhat different project, Gulf Pacific, and Transwestern.

Only one of those will succeed, but surely one couldn't find at this stage that El Paso will not succeed in getting the approval of the Federal Power Commission therefore, it isn't substantial competitive factor in the future market in California.

And I think the same thing is true here.

Now, if it --

Justice Arthur J. Goldberg: (Inaudible)

Mr. Archibald Cox: It -- no, it's not, it's not proof of that but what we do know is that Pacific can't put forward a variety of project in the past that it had been trying to do it.

We know in addition that that line there runs off Pacific, that it involved using some Canadian gas although, it couldn't have taken the same form, El Paso had some other gas in on it.

Furthermore, we know Mr. Justice, that Pacific both is in a inherent position where it was under a necessity of seeking this market and where it's forming this bridge, it almost seems inevitable in the logic of the situation that some independent company, that Pacific if it had fell independent remained independent.

One had continued to try the link the important new Canadian reserves and the important Rocky Mountain gas field with this enormous California market.

Now, we know that what it did in the past was something to be taken seriously.

Pacific was pushing ahead vigorously all through its existence.

We know that Edison took it seriously enough so that when Mr. Kayser first went to it and said he knew of the competition and he wanted to make a sale.

Pacific said it was not in a position to entertain any other offers.

So it must have thought that this at least was something that might go through.

We note the Southern Companies as preferred the figures.

We know that El Paso took it pretty seriously.

Its ball went to Pacific -- went to Edison and spoke of its intent to fight to the last ditch.

The first offer of a direct sale was made by El Paso, which it had never done before.

The terms of the acquisition of the stock suggests that Pacific can hardly have been thought of as having no potential, no value.

El -- had the market value of the stock that El Paso surrendered was four times, the book value of the Pacific stock.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Archibald Cox: Well, it says there is no -- it says in substance, there's no evidence that the buyers would have agreed to buy from Pacific, but I don't think that we're called upon to prove that.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Archibald Cox: I'm sorry.

Oh, I'm sorry.

I -- I skipped.

Well certainly, the -- there was a failure to develop some of the Canadian supplies that Pacific had hoped to use.

They didn't come in to be anything like what had been anticipated.

But if that is meant to be a prediction that because that supply failed, Pacific never could be a substantial factor in this market then I guess I would -- I don't think it is meant to be that, but if it is, then I would have to say that it's plainly against the weight of the evidence.

There's a great deal of other gas in Canada.

It was out of gas in the Rocky Mountain areas.

Well, Pacific had at least the opportunity to get some of it.

I think the real point here is that unless one has something like a failing company that to take a competitive situation like this, to take the largest company, the one which has been dominant in the market, the only supplier, and to allow it to snuff-out the serious promotional enterprise of another company which has advantages and disadvantages, where they balance out, one can't say.

But which is certainly a going concern and which is certainly in there pushing ahead to get some of the market is the antithesis especially in dealing with a source of energy of what the Clayton Act was intended to accomplish.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Archibald Cox: No, sir.

I -- well, I'm -- I'm sorry then because I misspoke myself if that's what I have said.

In the certain -- first place, I would most emphatically deny that Pacific was not in the market for selling gas -- projects of gas to California.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Archibald Cox: Well, but this -- but this is what people are engaged in selling.

They're not -- it's not the gas laid down through the pipeline being delivered today.

It's the -- they are engaged in rival promotions, that's what it is.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Archibald Cox: Well, I think that -- I think, Your Honor, that one doesn't have in the case of sales of shoes or of steel that the product being sold now isn't earmarked for the next X years and the rivalry comes in seeking to sell a future increment.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Archibald Cox: Certainly if their merging negotiations is to fill a demand, say in the third part of the company -- country which is not now filled in which they might enter as independent competitors.

I shall be here arguing not in the case of steel companies, but in the case of other companies in April that that is clearly a violation of Section 7.

And I don't mean by saying that I disagree with Your Honor's statement earlier to say that I accept the view that that is -- in accordance with Section 7.

The point I'm trying to stress is that a company which was admirably situated when you look at the logic of -- look at the logic of the situation which had its difficulties but which was going concern which nobody suggest to a failing company, which was selling the thing these people have to sell in the market at which was offered a rivalry in a market which is exceedingly thin at best.

That taking those circumstances into account and the fact that it had competed that this does tend to substantially left the competition.

Justice John M. Harlan: Aren't you what -- what you really quarrelling with here is not standard, is it? Isn't it the finding of fact which -- that you're -- were trying to return.

You said at the beginning there was a standard, a wrong standard and as I've been listening to you, it seems to me everything that you said goes to the question of whether the findings drawn from these undisputed subsidiary effects as they're largely are, were correct.

Mr. Archibald Cox: What -- well, what I think of the reason I said what I did was because it seems to me that the district judge as I've suggested undertook to find whether Pacific would have succeeded and that is what I mean is the wrong standard.

Now, if you read the findings the way it seems --

Justice John M. Harlan: You mean that's the wrong conclusion, that's the wrong facts.

Mr. Archibald Cox: No, I don't think that's the right question.

I think that's an utterly irrelevant question.

I think that if El Paso -- if Pacific was in the market seeking to sell that it could and then exert pressure on El Paso.

And even if El Paso was the one that came out ahead before the Federal Power Commission every time, still Pacific Northwest would be at least for a number of years, an important competitive factor.

That's why I think it was the wrong question.

Now, if you read the findings as meaning that Pacific was such applied by night that it couldn't exert any pressure -- couldn't ever exert any pressure on El Paso at all which I think is wrong.

But if you read them that way, then I do say that they are unsupported by the -- the conclusion that's contrary to what the evidence requires.

Chief Justice Earl Warren: We'll recess now.

Print this transcript Transcript: 

Argument of Gregory A. Harrison

Chief Justice Earl Warren: Number 94, United States, Appellant, versus El Paso Natural Gas Company, et al.

Mr. Harrison, you may proceed with your argument.

Mr. Gregory A. Harrison: Mr. Chief Justice and members of the Court.

Before commencing the argument in this matter, I would like to make a few references to a map that is distributed to the members of the Court yesterday.

The map that was used at the trial showing the pipeline system of the country is at page 894.

I wish to make a few comments because well, I'm sure not intentionally, certain misapprehensions might arise from the additions to this map that was distributed.

Let me call attention first to the heavy red lines at the bottom portraying the pipeline system of the El Paso Natural Gas Company.

In the first place, it will be noted that that stops at the state line.

But the main transmission system is picked up there however.

And all of the supplies that enter California are carried by the main transmission lines either of the Pacific Gas & Electric or the Southern Companies to the centers of production either at Antioch or Los Angeles and so the main transmission lines should be drawn to their conclusion.

Yesterday, a mention was made of the fact that there is no colored line portraying the Transwestern Pipeline System which counsel called attention to but dismissed with the comment that it perhaps did not amount too much of a pipeline.

It's a pipeline with a minimum capacity of 600 cubic million feet per day.

Justice John M. Harlan: (Inaudible)

Mr. Gregory A. Harrison: Well, it --

Justice John M. Harlan: (Inaudible)

Unknown Speaker: Yes.

Mr. Gregory A. Harrison: Yes, that's 97.

I would like to call attention now to the pipeline system of the Pacific Gas Transmission Company and the Pacific Gas & Electric which enters the United States at Kingsport on the Canadian border.

That is not portrayed in any color.

It is the largest pipeline system that enters the State of California.

It is a 30-inch pipeline and it is capable of carrying as much as one million cubic feet per day, the largest pipeline in the State too and in the State of California.

Furthermore, that pipeline system --

Unknown Speaker: (Inaudible)

Mr. Gregory A. Harrison: Number 68.

That begins at Kingsport on the Canadian border and goes to Antioch in California.

That same line, the Pacific Gas Transmission Line picks up all of the supplies which El Paso receives at the Canadian border and transmits it to Spokane and from Spokane to Klamath Falls.

And the El Paso Natural Gas Company takes supplies from that line and distributes it to its markets in those two States.

So it would seem that this is indeed an important pipeline system in this case.

The next thing that I would like to call the Court's attention to is a heavy dotted line running from the border of California near Las Vegas to Rock Springs.

Again, it would seem that if we are to portray that pipeline system, it should be all portrayed.

The pipeline system not only runs to the center of the areas of production in Los Angeles if it had ever been built but it would also have run all the way down through the system of the Colorado Interstate Gas Company to the sources of supply in the panhandle area of production.

So that instead of being a pipeline simply from Rock Springs to the boarder of California, it would be a pipeline system from the City of Los Angeles to Texas.

Since the Solicitor General has outlined the history of this case, I would like to mention some of the changes that have occurred since the suit was filed.

When the suit was filed, it was charged that the effect of the acquisition was to permanently exclude all competitors from the sale and transportation of natural gas in the several western states.

That charge is no longer made.

It is not claimed now that the El Paso Natural Gas Company had any reasonable prospect of ever competing with the Pacific Northwest in its northwest territory.

It is not now charged that there was any prospect of the Pacific Northwest Pipeline Company as a separate entity competing with El Paso in any of the southwest states or in Texas.

The question of anticompetitive effect of the acquisition in the fields of production has been -- have been abandoned.

There is no claim in this case of dominance of any market or a control of any market by El Paso.

The case appeared when it came here in the brief form to be limited to the State of California, to the natural gas market in the State of California.

And even then it is not claimed that El Paso had the power to exclude entry into the State of California with any pipeline project.

As a matter of fact, as I have already noted in discussing the map, since the commencement of this action, two major pipeline systems have entered the State of California and there is one already proposed and -- before the Federal Power Commission for action.

It does not, I believe -- it is not, I believe, claimed that at the time of the acquisition, there was any active competition going on the State of California between El Paso and Pacific Northwest or any other company.

There was no demand at that time to be satisfied.

And there was no opportunity for competition at that time.

We have come down then to this question, as I understand it in this case and as I understood the Solicitor General argue it yesterday.

Was the result of this acquisition a reasonable probability of a substantial lessening of competition in the natural gas market of California in the form of new major projects of the magnitude of not less than 300 million cubic feet a day over a period of say 20 years.

In the discussion yesterday, the Solicitor General did not analyze the present state of the California market.

The California market for natural gas at the present time consist or its consumptive needs, let us say, and its consumption of gas at the present time, consist of a use of four million cubic feet of gas per day, the figures which I give are approximate but they're fairly close.

Two billion seven hundred and fifty million cubic feet per day are received through interstate pipeline systems.

The balance of some one billion three hundred million cubic feet per day are purchased from local sources.

As to those deliveries which are interstate, they are certificated, deliveries of certificated sales under the Natural Gas Act and are we -- agree removed from the area of competition for the future.

Nevertheless, that is the present state of the market.

And we therefore looked to the future, if we look at all for any further competition.

The important thing is here that number one, it is incumbent, if the Government is to prove its charge, that an opportunity will arise in the future for the Pacific Northwest to compete had it remain separate.

And that had it remain separate, there was a reasonable probability that it could have afforded effective competition with respect to that opportunity.

Now, our answer to the argument of the Government in summary is that being true that, in the first place, El Paso Natural Gas Company did not dominate the California market at anytime in view of the fact that other companies have entered the State with major systems since the suit was filed.

The Government claims on the one hand that this demonstrates that opportunities were opened to others including the Pacific Northwest to likewise attempt to enter.

If it is true that the market was thus open to concerns generally to enter into a competition for these projects present or future then it is certainly true that anyone of a score or more of willing competitors named in this record would be equally qualified so to do.

And perhaps anyone of the owners of some 100 pipelines that are described in the Federal Power Commission exhibit might be just as well qualified and just as willing.

And in that event, the entry into the market is entirely free.

And the elimination of Pacific Northwest could have no possible effect.

Secondly, we argue that upon the record in this case, not only did the Government fail to bring forth evidence of any reasonable probability of entering into such a future market for a major pipeline enterprise but that the affirmative evidence shows that by reason of the financial condition of the Pacific Northwest Company at the time of the acquisition, by reason of the burdens and problems which confronted it, in attending to its own market in the Northwest, that it was in no condition to undertake such an enterprise.

And third, the Government finally retreats to the position covering its failure of proof by speculating as to mere possibilities in the unidentified future.

And in the course of so doing, attempts to reverse the burden of proof.

The natural gas is a wasting natural resource and an important source of energy.

It is divided into two general classifications for the purpose of this case.

First, there is residue gas which is produced in conjunction with the production of oil and is key to the production of oil.

And on the other hand, there is dry gas which is produced independent of oil.

The areas of production of natural gas, as the map shows, extend in a general way from Louisiana and it goes through Texas, Oklahoma, South Kansas, through the Rocky Mountains to Canada and in Canada through Alberta and British Columbia.

In all of -- in addition to that, there was a large production in California which is increasing at the present time.

All of the owners of the production in that area can seek their own markets in any direction.

They adopt a -- area of production serves the principle population centers of the United States, east and west.

And the producers, 85% of which are some 140 companies and consists principally the major oil companies of the country, are free to select their markets just as the markets in the various population centers are free to compete for the sources of production.

And so, one of the facts which it was incumbent upon the Government to prove in its charge in this case was, that the Pacific Northwest would have a reasonable probability of acquiring the character of undedicated resources necessary to serve a future major project.

And the minimum described by counsel would require undedicated reserves in the order of two and two tenths trillion cubic feet in the ground.

And as we would later point out, the Government failed to make that proof and the finding of the Court was against it, the second important fact with respect to the California market of the two buyers.

There were only two buyers of Interstate Natural Gas in the State of California, one of them, the Great Utility, the Pacific Gas & Electric Company in Northern and Central California and in the south the Southern Companies.

The Pacific Gas & Electric Company is the exclusive distributor of electric energy and natural gas in Northern and Central California, being authorized so to -- so to do by virtue of a certificate of public convenience and necessity issued by the Public Utilities Commission of the State of California.

And so there is no other distributor in that other -- area and all of the natural gas, whether it be local gas or interstate gas, is purchased by the Pacific Gas & Electric Company and it is the only buyer.

Much the same situation prevails in the Southern California.

There, the Southern Companies are the sole distributors of natural gas with minor exceptions, which do not affect the general statement.

And in addition to that, it is the distributive industrial gas to the two principal distributors of electric energy in Southern California to witness Southern California Edison Company and the Water and Power Department of the City of Los Angeles.

The result of that is that all interstate gas is purchased in Southern California by the Southern Company and there is no other buyer so that the purchasers of natural gas in the State of California exercise or can exercise complete market control, the Pacific Gas & Electric Company in the north and the Southern Companies in the south.

We now come to the genesis of the interstate market for natural gas in the State of California.

Before 1947, there were no sales of interstate natural gas in California.

Up to that time, these two buyers of natural gas bought all of their supplies within the borders of the State of California.

However, with the advent of World War II --

Chief Justice Earl Warren: (Inaudible)

Mr. Gregory A. Harrison: 1947, Mr. Chief Justice.

With the advent of World War II, as the war went on there was a phenomenal change in the demand for natural gas in California.

War industry's enormous industrial development and a growth in population estimated by the United States Census Bureau has 42% of the six years between 1942 and 1948 with a declining supply of local gas at that time, found the two buyers of natural gas short of their necessary supplies.

And so, they looked beyond the borders of the State to find a supply.

At that time, the El Paso Natural Gas Company was distributing natural gas in New Mexico and Arizona.

These two buyers in California approached the El Paso Natural Gas Company and discussions were carried on over a period of two years.

In the course of that time, the El Paso Natural Gas Company went out and bought enormous quantities of wet or residue gas, which at that time was for the greater part, being wasted in the air.

As a result, they were able to get together a project and entered into a contract in 1945 with the Southern Companies to deliver 305 million cubic feet of gas through a pipeline system to be built from Lea County in New Mexico to Blythe on the border of California.

Within two years thereafter, a similar contract was made with the PG & E for the delivery of 400 million cubic feet of gas for delivery at Topock on the border of California.

In both instances, the California companies took delivery at the border and transported to their own bank transmission systems, all of that natural gas to the centers of distribution.

The result was that by 1946, the El Paso Natural Gas Company had committed itself to deliver, in the order of 2 billion cubic feet of gas per day, to these two companies, one-half to the north and one-half in the south.

Up to this time, there had been nothing -- having the appearance of competition does not appear that there are many other offerors to supply the gas and it doesn't appear that the California Company sought anybody else to provide the gas.

At this point, I would think it appropriate to make some mention of the effect of regulation upon the market.

The Natural Gas Act, as the Court is well aware, regulates the interstate natural gas industry in many aspects including the regulation of rates.

But the important aspect to which we wish -- which we wish to mention this morning is the regulation under Section 7.

In pursuance of which, no interstate sales of natural gas for resale and no interstate facilities for the transportation of natural gas may be installed or constructed without a certificate of public convenience and necessity from the Federal Power Commission upon a finding that is in the public interest.

And such a finding must be predicated upon evidence showing that there is a market demand, that there's and adequate supply available, that the project is feasible and that the applicant is financially capable of carrying it to a conclusion.

In addition to that, the other provision of the Act which we would like to call the Court's attention to is that provision which provide -- that provision which restricts the operations of the Interstate Natural Gas Companies.

So that it may not discontinue the use of any facility, the giving of any service or the selling of any gas on the contract without a certificate of public convenience and necessity from the Federal Power Commission holding that action to be in the public interest.

The result is that once the certificates have been issued and the installations made and the supply contracts initiated, the duty is upon the pipeline company, if it's a pipeline company, to continue service until permitted to abandon or discontinue.

It is captive to its market and the market buyer is captive to its obligations to take the gas.

In addition to that, I might mention that since 1954, the Hinshaw Amendment, all interstate sales in California must likewise be approved by the Public Utilities Commission because the main transmission lines which carry all of the natural gas from the border to the centers of distribution are within the State of California.

I -- we agree with the Solicitor General that all of the supplies that were delivered to California in pursuance of these certificated market contracts are removed from the area of effective competition.

However, this -- as another aspect to wit in this case and that is this, once or more times in the brief and once or more times yesterday, the Solicitor General has referred to the corporate size of El Paso Natural Gas Company, don't he mean that at the time of the acquisition of assets in the order of a billion dollars.

I suggest to this Court that that investment was necessary in order to acquire the supplies which were dedicated to its public service.

They were necessary in order to build and to maintain the installations which it was required to do under its certificates.

And that that investment is a mere incident to its public service duty and the certificated contracts.

Nor is that size too notable when one realizes that the Pacific Gas & Electric, its Northern California customer has assets of $2.5 billion and net revenues two and a half times the net revenues of El Paso Natural Gas Company.

And that the supplies which it has brought from many of the major oil companies are from oil companies which have a corporate size, I think we can truly agree, for an excess of that of El Paso.

So much for vagueness.

In the mean time before 1956, the Northwest Pipeline Company had procured a certificate to serve the northwest markets.

It had had dedicated to it gas supplies in the San Juan Basin or I might say that are gas leases principally dedicated by the Phillips Petroleum, the Skelly Oil, the Stanolind Oil Company under leases which required it to develop and prove the reserves in the ground or to lose their rights in the leases.

Subsequently, it entered into a contract on December 11th, 1954 for the purchase of 300 million cubic feet of gas per day of Canadian gas from the Westcoast Transmission Company and that supply contract was certified.

And that supply was to be taken at Sumas, on the border of Canada and the State of Washington.

The fact of the matter is that at this time, the Pacific Northwest was confronted with an undeveloped market and with sources of gas supply which had not been proven and it had all of the problems confronting that there were incident to that situation.

Suit was filed in 1957 and was founded principally on the events that occurred in 1956.

I might say entirely, and because of much that what said yesterday in the brief about the Edison problem, negotiations of Pacific Northwest with Edison, I would like to review that story briefly.

The supply of gas which the Southern Companies provide to the Southern California Edison Company are limited in respect to the right of the Southern Companies to discontinue service when peak load demands of domestic customers require it.

In all other respects, the Southern Companies stand ready to and have always provided all of the gas supplies needed by the Southern California Edison Company.

The Southern California Edison Company was dissatisfied with the intermittent provision of its gas contracts and it importuned the Southern Companies to provide them with the firm supply and it importuned the Public Utilities Commission of California in proceedings before it to alter the situation and assure it supplies which will not subject to being cutoff.

All of these efforts failed and so, in the beginning of 1956, Mr. Quentin, the president of the Edison Company decided to go out and seek a firm supply of gas out-of-state.

He first called Mr. Kayser, the president of the El Paso Natural Gas Company and Mr. Kayser told him that he was very loath to make any contract for a direct supply of gas to Edison.

That the El Paso Natural Gas Company was committed to furnish a billion cubic feet a day to the Southern Companies, that any supply which he might sell direct to Edison would necessarily be taken from the demand of the Southern Companies which was then supplying the Edison Company.

And this would result in either facilities' increased costs and higher rates to the domestic consumers.

Sub -- subsequently, Mr. Kayser, as it's recited in the letter which the counsel referred to yesterday written on August the 24th, 1956 to the Edison Company, procured additional supply of gas in Louisiana but that was not fruitful because the gas was too expensive and that went nowhere.

In the meantime, after having discussed prospects for bringing interstate gas to Edison, Mr. Quentin met Mr. Fish.

And Mr. Fish undertook to put together a plan to bring the out-of-state gas to Edison.

The plan that was involved was that there were -- there was to be procured from Canadian sources by contract, a minimum supply of 300 million cubic feet per day to be transported by the Westcoast Transmission Company to the Canadian border, to be transmitted by Pacific Northwest Pipeline from the Canadian border to Klamath Falls in California and to be transported by the Pacific Gas & Electric Company to its center of distribution at Antioch the Pacific Gas & Electric Company to supply the Southern Companies by displacement.

On July the 30th, 1956, a tentative memorandum was signed by Mr. Fish and Mr. Quentin.

One that was termed Mr. -- by Mr. Fish a "humping license", so that Mr. Fish could hump the gas in Canada and so that the Edison Company could hump the customers in California.

On July -- on August the 9th, within 10 days after that, Mr. Sutherland, the president of Pacific Gas and Electric Company advised Mr. Quentin that the Pacific Gas & Electric Company had no interest in the project whatever because it intended to go to Canada for its own supply and would have no interest in the project.

And within 10 days later, the Southern Companies likewise indicated that they had no interest in the route and would not participate.

The result was that the project collapsed completely for two reasons.

In the first place, Southern California Edison could only take 50 to 75 million cubic feet of gas a day and it took 300 to make the project possible so there were no buyers.

In the second place, it required the use of Pacific Gas & Electric facilities to bring the gas from Northern California to Antioch and the Pacific Gas & Electric wouldn't provide the transportation.

Now, it would've failed inevitably for two other reasons.

It was contemplated that Pacific Northwest would bring Canadian gas down.

But the Canadian gas that he would've -- would have brought in -- brought down never materialized and does not materialize to this date.

The 300 million cubic feet of gas which it was agreed would be delivered to Pacific Northwest at Sumas only reach 250 million cubic feet a day at the time of trial.

Other --

Justice Arthur J. Goldberg: (Inaudible)

Mr. Gregory A. Harrison: Yes, Judge Goldberg.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Gregory A. Harrison: That is correct.

The fact is that to the present day not only has -- have the Canadians suppliers failed to come up to their original commitment of 300 million cubic feet a day if under the original 1954 contract from nine years ago.

But when the El Paso Company later, to support a Twin Falls project entered into a contract to purchase 400 million cubic feet of gas per day to be delivered at Kingsport, it was not forthcoming for a long time and finally only 150 billion cubic feet were delivered.

And that is being delivered into the northwest markets through the PGT system as I've mentioned in discussing the map.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Gregory A. Harrison: The resources in Canada have not been -- hap -- unhappily what they were expected to be.

I have no doubt that Mr. Fish believed that there was gas in Canada and plenty of it.

I have no doubt the El Paso thought there was a great deal or more gas in Canada than has developed and simply a disappointing result of Canadian reserves which I suppose is coupled with three elections to issue export permits.

Point -- the point of this whole story is that -- well, pardon me, we -- we were down to August the 9th and August the 20th.

Now, this juncture in the meantime, Mr. Kayser had discussed for the Southern Companies some proposal by which the Edison Company could be satisfied by cooperative arrangement.

And on the middle of August of 1956, the Southern Companies advised Mr. Kayser that they would be willing to cooperate in some cooperative enterprise for the purpose of bringing this gas to market.

He so advised to Mr. Quentin by letter dated August the 24th, 1956 referred to by counsel and I would be happy if the Court would have time to read it because it tells the story I'm now telling you.

He met with Mr. Quentin and as a result of that on October 2nd, after Mr. Kayser had been told that the whole Pacific Northwest proposal had collapsed and was nonexistent, proposed a tripartite arrangement by which 100 million cubic feet of gas per day would be sold to Edison to be brought in through the existing facilities of El Paso to be transported to the Edison boilers, to the facilities of the Southern Companies with a reservation to the Southern Companies of a minimum need for peak load requirements.

That ripened into a contract.

That contract was entered into before the acquisition and thus, the demand of Edison at that time disappeared from the picture.

But as we pursue the story further, when that contract of El Paso to serve Edison with 100 million cubic feet of gas per day came before the Federal Power Commission in this Docket 12580, the Commission rejected the contract upon the ground that to serve Edison directly for the boiler fuel purposes was contrary to the public interest.

And so, that 100 million cubic feet of gas per day again was relayed to the Southern Companies and it was left to the Public Utilities Commission of California to decide to what extent the supplies of the Edison Companies should be intermittent.

Furthermore, after the case in Docket 12580 was decided, the Edison Company appealed.

While the appeal was pending, it went to Texas and it bought its own source of supply from the Humble Oil Company in Texas.

And that commitment of the Humble Oil Company continues to this day.

And with the purchase of its own supply from the Humble Oil Company in Texas, the Edison Company disappeared completely from the market.

And we return to the proposition that -- that there always have been and still are and will continue to be on the two buyers of interstate gas in the State of California.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Gregory A. Harrison: The future growing needs of California for gas?

Counsel estimates and spaced upon evidence that the growing need for natural gas in California is at the rate of 200 million cubic feet a day, 100 million in Southern California and 100 million in -- in Northern Central California.

That is the estimate at the time of trial of the total growth but I'm afraid that counsel is under the misapprehension that that total growth is growth and demand for interstate natural gas which of course is not so, that is the estimated total growth.

And is the estimated total growth without res -- consideration or evaluation of the undisputed testimony at the trial that there are enormous increases in the production of intrastate gas by recently very large discoveries on the valleys and along the coast.

And until that, if you please, Mr. Justice Goldberg is consumed, there's no out-of-state of demand because that -- the policy of both companies comes first.

In addition to that, there are outstanding, a capacity of not less than 1 billion cubic feet of gas per day through existing excess facility capacity, 600 million through the enormous line of the PG & E in the north and 300 and odd million through the excess facilities of Transwestern in the south.

Not to mention one additional supplies may be generated by looping and compression on the El Paso system.

And concededly, there will be no demand for a new project to California, a new major project to California until all of the gas available at the incremental cost which can be fixed through existing capacities are satisfied.

It is said by the Federal Power Commission on the Rock Springs case that there was no expectation of any need for an out-of-state project in California at least until after 1968.

And when we tie into that, the fact that we have all of this excess capacity, when we have its growing development in the production of natural gas, it is very difficult to say.

When the time will come, that there would be an opportunity to bring to California a new major interstate gas project.

I would like to add to that that the undisputedly evidences record is that the competition of fuel oil is rapidly invading the industrial markets of the PG & E and the Southern Companies to such an extent that on the eve before the trial, the Pacific Gas and Electric Company lost as much as $5 million in revenue to industrial use of fuel oil notwithstanding the fact that they reduced their rate at the expense of the stockholders to try to hold the market.

So from such sources as this, it is clear to me, then one cannot say, when the increasing population of California, when the increasing demand in California will justify economically a new interstate natural gas project.

Have I answered your questions?

Resuming where I was and passing Docket 12580, I would like to pass now to the purpose of the -- in effect of the acquisition.

El Paso's purpose in acquiring the Pacific Northwest Pipeline Company stock was to add to its existing gas resources.

And I would like to refer again to the difference between residue gas and dry gas.

As I have pointed out, in the very beginning, El Paso made a specialty of acquiring large quantities of residue gas.

However, residue gas then was very cheap.

Most of it was being wasted.

And El Paso was able at that time to get very good rates on the purchase of this wasting gas.

What -- the use of this residue gas involves very difficult operating problems because the production of the gas in the oil field is key to the -- key to the production of oil and not to the need for gas.

I don't know of states where there is rationing of production is also keyed to the rationing of the production of oil.

This results in enormous fluctuations in the daily availability of residue gas to a point where it has gone as far as a variation of 500 million cubic feet in a single day.

And the only way to balance this problem was to attempt to procure a dry gas.

And so, El Paso was seeking the best of its ability to acquire dry gas at the time of the acquisition.

In addition to that, the Federal Power Commission had, on several occasions, questioned the sufficiency of the supply of gas generally in its reserve to resupply the market commitments which it had made.

It was pointed out in one of the decisions of the Commission that El Paso was expending gas at the rate of a trillion cubic feet a year.

And that if it was to maintain its position and unable it to thoroughly go through with its obligations, it would be necessary for it to acquire additional supplies.

On the other hand, the Pacific Northwest had these leases which had been committed to it by the oil companies, principally the Phillips Petroleum Company in the San Juan area.

It was believed that there were promising prospects of procuring additional gas in Canada and there was hope that by opening up the areas in the Rocky Mountain districts, that for the gas supplies would be found.

The purpose of the -- of El Paso in acquiring stock of Pacific Northwest was to acquire these supplies and the reserves.

And as a matter of fact, they were sufficiently successful in that regard so that ultimately in the final disposal of Docket Number 12580, the Commission expressed the opinion that it had accomplished its purpose.

And Mr. Laurence, the Executive Vice President of the Southern -- one of the Southern Companies testified that a review by various companies indicated that El Paso had acquired sufficient reserves if no more than necessary to carry through its service contracts.

Now, I did not understand at all that there was any question about this being the purpose of the acquisition.

The Court so found no other purpose has ever been suggested that I know except the reference yesterday to the subject of Southern California Edison and that we have disposed of.

And so, it seems to me that this disposes also the question of vagueness if vagueness has a place because the purpose was to serve the contracts which the Pacific Northwest that had in this market to protect the reserves which El Paso had in this market.

And that, we submit, is -- has no anticompetitive objective.

I might say that it served its purpose.

They might say that not only did they acquire these reserves but they acquire the flexibility of operation which maximize the use of those reserves by enabling them to use southern supplies of gas to meet peak demands of the north and northern supplies of gas to meet peak demands in the south.

They were able to firm up their dry gas to point where they have 50% dry gas as against 50% residue gas, then have been able to maintain rates in their markets in California far below the price of any other gas sold in California, whether it'd be intrastate or interstate and far below the price of any gas that's ever been offered to the State of California.

Justice John M. Harlan: (Inaudible)

Mr. Gregory A. Harrison: I'm sorry, Mr. Justice Harlan.

Justice John M. Harlan: (Inaudible)

Mr. Gregory A. Harrison: No, there was practically no reference made to the Federal Power Commission on the trial in the District Court, Mr. Justice Harlan.

It did not appear there.

Justice John M. Harlan: (Inaudible)

Mr. Gregory A. Harrison: No, they have not.

I -- you will recall that they passed upon these questions once before.

But in view of the decisions of this Court, it hardly seemed appropriate to introduce any of the matters before the Federal Power Commission before the trial court.

Justice John M. Harlan: (Inaudible)

Mr. Gregory A. Harrison: What has happened now since 1957?

In the first place, Pacific Gas and Electric Company went to Canada and acquired its supplies, created its corporate agent, the Pacific Gas Transmission Company and is now bringing and has been bringing 400 million, 15 million cubic feet of gas per day to its market with an excess capacity of some 600 million cubic feet.

Thereby, the Pacific Gas and Electric Company passed out of the market and the market in Northern and Central California disappeared as a market for any future project of an independent company to bring interstate gas to Northern California.

In that connection, it will be noted not merely that it went to Canada.

What the Pacific Gas and Electric established the firm policy in 1956 that it would find its own supplies, whether it'd be in the gulf, in Texas or in Canada or elsewhere.

And so, there is no future market or an interstate project to the Pacific Gas and Electric or to Northern California by any independent company.

In the meantime, the Southern Companies had gone out to get additional gas, had selected supplies of principally the Gulf Oil Company in Texas and New Mexico, entered into contracts to buy supplies of gas from them without so far as the record indicates, any offer to others or any invitation for others to bid.

And the result was that the Gulf Oil and Warren Oil interest created their own corporate instrumentality to Transwestern Pipeline Company which entered into a contract to sell not less than 300 million cubic feet of gas per day to the Southern Companies.

And it built its -- and sold its facilities with an excess capacity -- of an excess of 300 million cubic feet per day.

In the meantime, the Southern Companies decided to explore for their own sources of gas.

And they have now acquired substantial acreage in the Rocky Mountain areas with promising indications that they will be able to develop their own independent supply.

In which event, there will be no future market in California for any independent project.

The Pacific Gas & Electric Company has become a vertically integrated gas company from production of gas to the consumer tip.

And if the Southern Companies follow the same procedure, the same thing will happen.

And so, notwithstanding the growing need of California for gas in the future, it is by no means certain that there will be any market for the Pacific Northwest, El Paso or any other independent company.

And if there is no reasonable probability of a market for the gas as some reasonably certain future date, I submit, the -- the charge of the Government must fall.

There are other people who sought to enter the market here.

And if the Government takes the position which it took at one point yesterday, that not only Pacific Northwest but some other concern could come forward and obtain gas and seek to enter the market, may we point out that other reasonably well qualified companies have made the same offers.

The Southern Union Gas Company which has pipeline installations and resources in the San Juan Basin has offered to supply California.

The Westcoast Transmission Company, which provides all of the Canadian supplies of the Pacific Northwest, have offered sale to California.

The Colorado Interstate Company, in connection with the project at Rock Springs, offered to sell 200 million cubic feet from the Panhandle and Permian Basin to California.

These are all pipeline companies.

They're all just as close to California as PNW.

What if beyond that?

There are -- and we do not agree by the way that this is the proper test of competition.

We do not agree that the mere willingness to come in and attempt to serve -- constitutes genuine competition.

We insist that the proper rule is that there must be a reasonable probability of becoming an effective competitor or the charge of the Government is not established.

But there are large number of other companies who are perfectly willing to sell, a score of them in the record.

And any number could be selected among the other pipeline companies in the country who perhaps would be only too willing to propose.

But Pacific Northwest in contrast to the others were under -- was under a great stability.

In the first place, it found itself with leases to drill and to protect as Mr. Fish put it.

It required immediately money in the nature of $30 or $40 or $50 million at once and they had no place to get it.

They had no gas to supply their market with, had it not been that El Paso furnished them with a supply for the first five years of their activities to be returned to El Paso beginning the seventh year.

They had no supplies in Canada or the San Juan Basin to offer to Edison.

Their financial condition was such that they lost substantial moneys in the first year, 1957 and over a three-year period.

Out of an estimated earnings of $23.5 million, they earned $22 -- they -- they failed to earn 22.

The testimony was that the financial condition of that company was such but there was no expectation that it could launch a major product -- project for as far down the line as one could see.

And this was the testimony of its then president or the president at the time that this occurred, Mr. Silloway.

Now, some reference is made yesterday to the proximity of the Pacific Northwest Pipeline in California so that were some advantage.

We find it a little bit difficult to understand that contention in view of the fact that it did said that the pipeline of El Paso entering California is no advantage.

The pipeline of Pacific Northwest was just truly dedicated to the northwest as the pipeline of El Paso was dedicated to California.

And the proximity of the pipeline has no particular relevancy to the problem.

It's not the proximity of the pipeline.

It's the availability of undedicated adequate supplies within the economic reach of the market.

And thus, it was held in the Rock Springs case that the 200 million cubic feet a day and the Colorado Interstate were too far from the market.

Although, those supplies were to take off from Rock Springs on the old Pacific Northwest line.

And facilities of the Westcoast Transmission are just as close to California as those of the Pacific Northwest.

The fact is that -- there was certain furtherance which the Government assumed when it brought its charge here.

It was its burden as we see it to prove that there was a reasonable probability of competition to the State of California.

I do not know from the argument yesterday whether counsel has changed his market from California to Southern California because he didn't mention Northern California in the cause of his remarks.

But the burden which they had to establish was, that there was a reasonable probability that the acquisition and the effect of substantially lessening competition either in California or in Southern California.

In order to accomplish that, there were certain very definite matters of proof which was incumbent upon the Government to establish.

First, that the Pacific Northwest would be interested in going to California.

Now, we submit that's a purely conjectural matter to say that the Pacific Northwest because it made one futile effort in 1956, completely frustrated, would 10 or 15 years later, decide again to attempt to go to California is pure surmised.

What they would decide to do 15 or 20 years or 30 years hence would depend upon the circumstances as they then presented themselves to the management.

Among other things, it would depend upon whether they could obtain the necessary undedicated supplies.

It would depend upon whether they care to invest in those supplies and in the project and why -- why the California market?

Why not the Chicago market?

Pacific Northwest tried to go in Chicago market once and failed just as it failed in California.

Why not any other market within the economic reach or whatever supply it could find?

So much for the conjecture, we'd try to go to California.

Next, it would be necessary to establish that some California distributor, one or two, either the Pacific Gas & Electric or the Southern Companies could be interested in the project to be put forward.

And we submit there was no evidence to indicate any such consideration and the record as it in the past, it had been rejected completely by both companies, not only the route but the company.

Next, it would be necessary to establish the Pacific Northwest had a reasonable probability of procuring the necessary undedicated supplies and reserves.

As I have already said, the supplies and reserves which it attempted to procure never did materialize.

Is it necessary to establish that the Pacific Northwest would have the financial ability to be a serious competitor?

And in that respect to have overcome all of its financial difficulties and obstacles.

But there was no evidence in this record that it would every have overcome them.

And finally that there was a reasonable probability that the Pacific Northwest Pipeline, as a separate entity, could, at some future date, put together a project having some reasonable prospect of favorable consideration by the buyer and by each of the two regularity bodies.

We do not say and the Court did not say, it did not attempt to pass upon the question whether in the last analysis any particular project of any particular entrepreneur-promoter would or would not be approved by any promoter.

But the burden was not upon us to prove that it could not be obtained.

It was not upon us to prove that the project must fail.

It was not upon us to prove that they couldn't compete.

It was upon the plaintiff who made the charge of violation of Section 7 to prove that there was a reasonable probability of these things occurring in the future.

And it's at this point that the Government changes its position and attempts to rescue a case in which it has introduced virtually no evidence.

It is here I think that the Government states that it is hardly proper to consider matters of this kind in the frame of reference of the early future.

Implicitly, the Government yields to the argument that competition would not have occurred in the past.

That there was no reasonable probability at the time of the acquisition that would've occurred in the years up to this date, if you please, or even in the few years that lie ahead.

But while implicitly conceding that, the United States then receives into the prediction that the longer we look ahead, the more likely it is that substantial competition will arise.

That Pacific Northwest would somehow, in the long years to come, acquire the financial ability, have the opportunity and become an effective competitor.

What they attempt to do here is to say we cannot prove anything as of now or as of the early future what -- by -- by projecting the whole problem into the unforeseeable future, we are -- we're to leave the necessity of proof.

And it is then incumbent upon the defendant in the case to produce proof to the contrary.

Justice John M. Harlan: (Inaudible) between you and the Government on the legal standard?

Mr. Gregory A. Harrison: Yes, but --

Justice John M. Harlan: The Solicitor General says that he is not trying, except for the minor exception or two as I understand the argument, to overturn the findings of fact of the lower court but he claims that the findings of fact are based on an erroneous legal standard.

Now, is this what you're talking about now?

Mr. Gregory A. Harrison: Yes, that's right.

I think I am.

Justice John M. Harlan: Because all of these to me, at the moment means that you draw different conclusions from common legal standard.

I cannot understand what the legal standard is that differs but that you differ with the (Voice Overlap).

Mr. Gregory A. Harrison: I can only say that as we understand the argument of the Government that it seems to us to be reduced to the area of surmise and conjecture and nothing else.

Counsel said yesterday, as I recall it, that there was something between probability and conjecture.

I would suggest that it's all conjecture and no probability because there was no evidence to sustain any probability or any finding of probability in this case.

May I point out also what counsel said yesterday when he was interrogated on that very question, that it was the position of the Government that this question should be left to the test of the marketplace in the future.

Now, that would mean, may it please the Court, which should be left to the market, test to the marketplace in the future, the decree of divestiture must automatically be entered without evidence so that the Pacific Northwest will remain separate and the -- the test of the marketplace of the future read the guide and that eliminates all necessity for evidence.

And yet, on the other hand, the Government brought a suit and asked the trial court, if you please, to make a finding that there was a reasonable probability that this effective competition would arise in the future.

And how he can say on the one hand, I'm asking the Court to find that there's a reasonable probability of substantial competition, the natural gas market in California and say we must leave it to the future market to test it.

I simply do not understand.

All that happened was that the trial court made an entirely different finding than that which the Government asked.

It may define and there was no such probability at the present, in the earlier future or at anytime at all.

And if one will look at the last page of the brief of the Government here, it would be seen that the questions are cast in the negative.

It is not a question as these questions are posed on the last page of the brief whether the Government has proved something or failed to prove something, the question is whether, if you please.

The Court or the defendants can't speculate that competition will not arise in the future.

Whereas as I, suggest to this Court that the speculation is all on the part of the Government.

It is the Government which speculates and then reverses the whole procedure by saying that we speculate and the Court speculates when it finds against the plaintiff.

Chief Justice Earl Warren: Mr. Solicitor General.

Argument of Cox

Mr. Cox: Mr. Chief Justice, may it please the Court.

I want first to address myself to the changes in the competitive picture, the structure of the market that have developed since the merger, which I had no time to speak to yesterday.

And then second, I will try to explain more clearly than perhaps I did yesterday, what we think the question of the legal standing here is.

And I'll take them up in that order.

El Paso argues, as I understand it, that the changes since the merger show that the merger or acquisition, more accurately, will not substantially lessen competition.

First, because PG & E has build a very large pipeline to carry -- to California to Canada.

And second, because of developments in the southwest.

Now, it's quite true that in the near future, for 10 years, perhaps 15 years, the PG & E pipeline, the Pacific Gas Transmission will satisfy all the demands of that company.

And that for the immediate future, changes the picture indisputably, I can't argue otherwise.

The fact remains however that we are dealing here with very long range problems.

We are dealing with the economic future in the sense of this whole area.

And El Paso's current contract to supply PG & E will run out.

We think this still, the Pacific, as an independent company, would still offer and might offer an alternative.

Down the southwest, the argument is that the development of Transwestern which has a pipeline and the effort of Gulf Pacific to get in, which are the most real things, supplies sufficient competition.

It seems to us assuming that the events after the merger are relevant that there are three comments that should be made that --

Justice William J. Brennan: (Inaudible)

Mr. Cox: You mean PG and -- Edison's acquisition of its own source?

Justice William J. Brennan: (Inaudible)

Mr. Cox: Oh, that hasn't been approved yet.

That's one of the rivals here that I referred to as the Gulf Pacific, if I understand it correctly.

Justice William J. Brennan: (Inaudible)

Mr. Cox: I think not.

No, no, couldn't have?

If it -- it -- the -- I'm not.

I don't want to overstate that as my --

Justice William J. Brennan: (Voice Overlap) --

Mr. Cox: -- expression perhaps shows I'm not absolutely sure but I don't think it preceded the merit.

Justice William J. Brennan: (Inaudible)

Mr. Cox: Yes.

And in -- in essence, there's a comparative proceeding before the -- the FPC at the present time to serve this expected increment of demand.

Transwestern has supplied Gulf Pacific which it will bring in this King Ranch Gas that you just spoke of, the Humble Gas and El Paso, they are rivals.

One may win, or perhaps two will get certificates.

One can't tell.

Our position essentially is that if Pacific were an independent company, it would be there as a fourth or might be there as a fourth concern.

And that it would be offering a quite different alternative.

These all relate to gas coming from the southwest from the older region.

Pacific's alternative in all probability would be one of this to bring gas from Canada or possibly some from the Rocky Mountain sources.

Now, of course, El Paso is in a position to offer that.

But if El Paso offers it, it's a decision made by a company which has very heavy commitments in the southwest.

If it was specific as an independent and if we're able to put one together, it would be an entirely different opportunity.

And the pressure of this competing rivals even though only of them get it before the Federal Power Commission, we think is very important.

I would also point out that three company -- one company -- two companies with pipelines to a market like Los Angeles and another company trying to get in is very thin rivalry indeed compared to what exist elsewhere in the country.

In New York City, there are four interstate pipelines carrying gas to that area.

In Detroit, much smaller, four.

In Pittsburgh, there are seven.

In Chicago, there are four.

And the Chicago interstate market is much smaller than the Los Angeles interstate market.

In Saint Louis, there are four there, and three trying to get in.

So that the amount of competition that exists even since the merger is, we think, is simply not enough but it's small in comparison with others.

And it seems to us that the longer one projects into the future and I do submit that we're concerned with the long range future, not 1968, that's almost nothing in terms of this merger.

It's the 1970s, 1980s, and beyond that we're concerned with, that the longer the perspective, the more important this Rocky Mountain gas and the Canadian gas and Pacific's opportunities would come.

Now, I turn to the other question.

And I think the two ways of putting it, I would say, Mr. Justice Harlan, that our position here, essentially, is this.

That one should -- that the Clayton Act, Section 7 and the principles laid down by this Court require one to focus on the number of companies seeking to serve the -- a market, their size, their number, their comparative size and things to that kind.

And that if we show that Pacific is a going concern, interested in the market, one that is tried to sell in the market has offered some rivalry and that there are not other companies so that the withdrawal of this one has no effect on that of competitive picture, then we have proved our case.

Now, there are -- there are two dangers on either side.

Of course, if we all we show is that Pacific is a pipeline company, there are, as Mr. Harrison said, great many pipeline companies that wouldn't do.

On the other hand, if we have to show, if we have to prove that Pacific would get some of this contract, which is what I think the District Court erroneously inquired into, if we have to speculate as to what would happen in the future and offer all kinds of factors to -- how successful Pacific would be, then I suppose, we have failed to prove our case.

But we think essentially when we've shown a -- a going concern, a company that has offered some rivalry, a company that has an interest in the market, not only because of the logic of its situation but one expressed on several occasions in the past, then that is all that the statute required us to prove.

And that the District Court was wrong in estimating the probabilities as to what would happen if the structure of the market had not been impaired.

And we say that for two reasons.

One is, since the sportswriter is known very well this morning, it's very difficult to predict the future and it's even more difficult to predict the business future.

And the second one is that the presence of this -- of a rival, or one seeking to be a rival, who at least had something to offer, was a going concern, it was fighting to overcome its difficulties, does affect the conduct of the other firms in the market.

And that's why we think it's that -- those elemental facts of the structure that are decisive.