United States v. El Paso Gas Co.

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.