FTC Staff Comment Before the Federal Energy Regulatory Commission Concerning Brokering of Interstate Natural Gas Pipeline Capacity

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UNITED STATES OF AMERICA 	i;' ::.;','}:;'/, 	;:-, r-,
FEDERAL ENERGY REGULATORY COMMISSIO&"';"';;; ,~.'i;7 ,«;:.;; y
j '}, "j ,·'1 [3:; IGI'"
COMMISSION AUTHORIZED
Brokering of Interstate Natural Gas)
Pipeline Capacity 	) 	Docket No. RM88-13-000
June 17, 1988
STATEMENT OF THE UNITED STATES FEDERAL TRADE COMMISSION STAFF

UNITED STATES OF AMERICA
FEDERAL ENERGY REGULATORY COMMISSION
Brokering of Interstate Natural Gas)
Pipeline Capacity 	) 	Docket No. RM88-13-000
Statement of the United States Federal Trade Commission Staff 1
I. Introduction
The staff of the Federal Trade Commission 2 appreciates this opportunity
to comment on the Federal Energy Regulatory Commission's (FERC) Notice of
Proposed Rulemaking (NOPR)3 for brokering of interstate natural gas pipeline
capacity. 	The 	proposed 	rule 	would 	allow 	holders 	of 	firm 	transportation
rights 4 on 	interstate 	natural 	gas 	pipelines to 	sell 	(i.e., 	broker) 	those 	rights
to other customers. 	Under 	the proposed 	rule, 	these 	sales could 	take 	place
1 	These comments represent the views of the Bureaus of Competition,
Consumer 	Protection, 	and 	Economics, 	and 	do 	not 	necessarily 	represent 	the
views of the Federal Trade Commission or any individual Commissioner. 	The
Commission 	has, however, authorized the staff to submit these comments to
you.
2 Inquiries 	regarding 	these 	comments 	should 	be 	directed 	to 	John
Morris (202-326-3522) or Michael Vita (202-326-3493) of the FTC's Bureau of
Economics.
3 	Federal 	Energy 	Regulatory 	Commission, 	Notice 	of 	Proposed
Rulemaking: 	Brokering 	of 	Interstate 	Natural 	Gas 	Pipeline 	Capacity, 	18 	CFR
Parts 284 and 385, Dkt. No. RM88-13-000, April 4, 1988.
4. 	A small (but increasing) number of pipeline customers purchase only
transportation 	rights 	on 	pipelines; 	that 	is, 	they 	purchase 	gas 	transmission
services from 	the pipeline, but 	procure 	their gas from 	a source other than
the pipeline (e.g., a gas producer). 	A holder of firm transportation rights is
anyone 	who 	has a 	right to guaranteed 	transportation service on a 	pipeline.
Pipelines also sell interruptible service, which means that the service can be
interrupted 	on 	short 	notice. 	Currently, 	most 	customers 	purchase 	"sales
rights" 	rather 	than 	only 	transportation 	rights 	from 	pipelines. 	This 	means
that the customer buys both gas and gas transmission services from the pipeline.

at 	unregulated 	prices only 	in 	markets 	that 	FERC 	determines 	(in 	separate
proceedings) 	to 	be 	"workably 	competitive." 	In 	markets 	not 	found 	to 	be
competitive, the transactions would be subject to a price cap.
As we discuss below, we believe 	that the proposed 	rule could 	lead 	to
greater 	efficiency 	in 	gas 	transportation 	markets, 	thereby 	benefitting
consumers 	of 	gas 	and 	gas 	transmission 	services. 	The 	competitive 	analysis
used 	by 	the 	FTC 	in 	its 	merger 	investigations 	may 	help 	FERC 	identify
workably competitive markets.
II. Interest and Expertise of the FTC Staff
The 	Federal 	Trade 	Commission 	is 	charged 	with 	the 	responsibility 	of
enforcing 	the 	Federal Trade 	Commission 	Act,S 	which, 	among 	other 	things,
prohibits "unfair methods of competition." 	The FTC and 	its staff seek 	to
promote competition 	in energy 	markets 	through 	law enforcement actions. 6
Additionally, in recent years the FTC's staff has filed comments in support
of greater competition in energy markets before various regulatory bodies,7
S 	15 U.S.C. 41 et seq.
6 See, e.g., Midcon Corp., 	107 F.T.C. 48 (1986); InterNorth, Inc., et aI.,
106 F.T.C. 312 (1985).
1 	See Statement of 	the Federal Trade Commission Staff, 	Inquiry 	Into
Purchasing 	Practices 	of 	Interstate 	Pipelines, 	FERC 	Dkt. 	No. 	RP83-96-000,
July 	1, 	1983; 	Comments 	of 	the 	United 	States 	Federal 	Trade 	Commission
Staff, 	Regulation 	of Natural 	Gas 	Pipelines 	After 	Partial 	Wellhead 	Decontrol,
FERC .Dkt. No. 	RP85-1-000, 	March 	1985; 	Statement of 	the 	Federal 	Trade
Commission 	Staff, 	Inquiry 	Into 	Alleged 	Anticompetitive 	Practices 	Related 	to
Marketing 	Affiliates 	of 	Interstate 	Pipelines, 	FERC 	Dkt. 	No. 	RM87-5-000,
January 	1987; and Motion of the Federal Trade Commission Staff for Leave
to 	Intervene 	(With 	Attached 	Staff 	Comments), 	In 	the 	Matter 	of Texas 	Gas
Transmission Corporation, Docket No. CP87-205-000, July 30, 1987.
2

including 	comments 	to 	FERC 	on 	the 	potential 	benefits 	of 	increased
competition in gas and gas transportation markets. 8
III. The Notice of Proposed Rulemaking
A. Brokering Firm Transportation Rights
The NOPR proposes to allow holders of "firm transportation rights"g on
"open 	access"10 interstate 	natural 	gas pipelines 	to sell 	those rights 	to other
customers. 	Under 	the 	proposed 	rule, 	these 	sales 	could 	take 	place 	at
unregulated 	prices 	only 	in 	markets 	that 	FERC determines 	to 	be 	workably
competitive. 	Otherwise, the transactions would be subject to a price cap.
Currently, pipeline customers, such as local gas distribution companies
(LDC's) 	and 	industrial 	users 	of 	natural 	gas, 	usually 	obtain 	these 	firm
transportation 	rights 	under 	long 	term 	contracts, 	which 	provide 	for 	the
8 [d.
9 See footnote 4, above.
10 "Open 	access" 	pipelines 	are 	those 	interstate 	pipelines 	that 	have
obtained 	blanket authorization 	to carry gas for 	others. 	See Regulation 	of
Natural 	Gas Pipelines After Partial Wellhead Decontrol, Order 	No. 436, 50
Fed. Reg. 42,408 (Oct. 18, 1985) [Regulations Preambles 	1982-1985] modified,
FERC 	Stats. 	& 	Regs. 	par. 	30,665 	(1985), 	Order 	No. 	436-A, 	50 	Fed 	Reg.
52,217, [Reg. Preambles 	1982-1985] FERC Stats. & 	Regs. 	par. 	30,675 (1985),
modified 	further, 	Order No. 436-B, 51 	Fed. Reg. 6398, III 	FERC Stats. and
Regs. 	par. 	30,688, 	reh'g 	denied, 	Order 	No. 	436-D, 	34 	FERC 	par 	61,405,
reconsideration denied, Order No. 436-E, 34 FERC par. 61,403 (1986), vacated
and 	remanded 	sub nom. 	Associated 	Gas Distributors v. 	FERC, 824 F.2d 981
(D.C. Cir. 	1987). 	On August 7, 	1987, the Commission [FERC] issued Order
No. 	500, 	which 	promulgated 	interim 	regulations 	in 	response 	to 	the 	court's
remand. 	Regulation 	of 	Natural 	Gas 	Pipelines 	After 	Partial 	Wellhead
Decont-rol, 	Order 	No. 	500, 	Fed. 	Reg. 	30,334 	(August 	14, 	1987), 	III 	FERC
Stats. & Regs. par. 30,761, extension granted, Order No. 500-A, 52 Fed. Reg.
39,507, (Oct. 22, 1987), III FERC Stats. & Regs. par. 30,770, modified, Order
No. 500-B, 52 Fed. Reg. 39,630 (Oct. 23, 1987). 	III FERC Stats. & 	Regs. par
30,772, 	modified 	further, 	Order 	No. 	500-C, 	52 	Fed. 	Reg. 	48,986 	(Dec. 	29,
1987) III FERC Stats. & 	Regs. par 30,786 (1987), Order 	No. 500-D, 53 Fed.
Reg. 8439 (March 15, 1988).
3

exchange 	of 	a 	specific 	quantity 	of 	transportation 	services 	for 	payments
determined 	by 	the 	applicable 	firm 	transportation 	tariffs. 11 	If a 	customer
finds 	that 	it 	has 	contracted 	for 	more 	transportation 	services 	than 	it
currently can use, it still pays the fixed costs associated with that volume of
capacity 	for 	which 	it has contracted 	but does not 	use. 	FERC 	regulations
then order the pipeline to offer to sell this unused capacity to the pipeline's
other 	customers 	at 	a 	price 	that 	does 	not 	exceed 	that 	specified 	in 	the
applicable interruptible tariff. 12 	Sales of this capacity can, however, only be
made on an interruptible basis,IS and then only on a first-come, first-served
basis. 14 	According to FERC, the absence of capacity brokering has resulted
in 	a 	virtual 	absence 	of 	a 	market 	for 	short-term 	firm 	transportation
rights. 15 	Further, 	because 	interruptible 	services 	are 	allocated 	on 	a 	first-
come, 	first-served 	basis, 	rather 	than 	by 	price, 	these 	services 	are 	not
11 These tariffs are established in FERC regulatory proceedings.
12 18 CFR § 284.9 (I987).
13 See 	footnote 	4, above, 	for 	a 	discussion of 	the differences between
firm and interruptible service.
14 Under 	the 	first-come, 	first-served 	system, 	a 	customer 	wishing 	to
buy interruptible transportation on a pipeline notifies FERC and the pipeline
of its request, and is then placed at the bottom of the queue. 	The customer
receives 	service 	only 	if 	there 	is 	more 	than 	enough 	capacity 	to 	serve 	the
customers who occupy the higher positions in this queue.
15 FERC reports (see NOPR, p. 7) that many customers have complained
a bout the 	lack of a vaila bility of short-term transportation services. 	There
would 	appear 	to 	be 	relatively 	little 	capacity 	available 	for 	short-term
transportation 	sales. 	As 	of 	1987, 	about 	85 	percent 	of 	interstate 	pipeline
capacity 	was 	still 	controlled 	by 	long-term 	contracts 	signed 	before 	1987.
Because FERC certificate regulations often require pipelines to continue to
serve customers even 	after 	long-term contractual 	obligations expire, only a
portion of the remaining 15 percent would be available to provide short-term
firm transportation services. 	See Order No. 500 (Interim Rule and Statement
of 	Policy) 	Regulation 	of 	Natural 	Gas 	Pipelines 	After 	Partial 	Wellhead
Decontrol, Dkt. No. RM87-34-000, August 7, 1987, appendix B.
4

necessarily 	allocated 	to 	the 	users 	who 	value 	the 	service 	the 	most. 	The
proposed rule would permit firm transportation capacity holders to sell their
firm 	transportation 	rights directly 	to other customers at 	unregulated 	prices
in 	markets 	that 	FERC 	has 	determined 	to 	be 	workably 	competitive. 	In
markets determined 	not 	to 	be workably competitive, FERC 	would 	establish
price caps.
Permitting the 	brokering of firm 	transportation 	rights 	could 	result 	in
the 	reallocation 	of 	these 	rights 	to 	users 	who 	value 	them 	the 	most.
Brokering 	will 	also 	allow 	a 	new 	class 	of 	service 	(i.e., 	short-term 	firm
transportation services) to be made available in the marketplace. 	Under the
proposed 	rule, pipelines would continue to be required to offer for sale all
unused firm capacity as interruptible capacity at or below the price specified
in the applicable tarifL 16 	Therefore, it appears likely that existing classes
of service will continue to be available, and that new classes of service may
result from the rule. 17 	Expanding the array of available gas transportation
services 	in 	this 	way 	could 	result 	in 	more 	efficient 	markets 	for 	gas
transportation services.
16 18 CFR § 284.9 (1987); see also NOPR, p. 16.
17 The quantity of capacity available on an interruptible basis is likely
to fall 	if brokering takes place. 	This, however, would 	reflect the efficient
reallocation of capacity from lower-valued to higher-valued uses.
5

B. Workable Competition
FERC 	proposes 	to 	identify 	markets 	that 	are 	workably 	competitive 	by
calculating Herfindahl-Hirschman indices (HHls) from market share data on
current capacity holders. 1S 	Markets whose HHI values fall below some level
would 	be 	designated 	as 	workably 	competitive, 	and 	FERC 	would 	permit
capacity brokering to take place without price caps. 	It is our understanding,
then, that FERC would use the HHI to establish a "safe harbor" (i.e., a set
of conditions that, if satisfied, would virtually guarantee a market exemption
from the price cap regulations).
Delineating 	appropriate safe 	harbors 	can 	generate a 	variety 	of social
benefits. 	For 	example, 	the 	resources 	of 	government 	enforcement 	agencies
can 	be 	focused 	on 	monitoring 	those 	situations 	where 	anticompetitive
activities are 	most likely 	to occur. 	Regulated 	firms, 	in 	turn, have clearer
guidance 	on 	enforcement 	procedures, 	and 	this 	reduces 	their 	costs 	of
complying with the applicable regulations.
What remains unclear is (1) how FERC intends to calculate the market
shares 	that 	will 	be 	used 	in 	the 	HHI 	calculations, 	and 	(2) 	whether 	FERC
intends 	to 	use 	other 	criteria 	to 	identify 	markets 	that 	are 	(or 	are 	not)
workably competitive.
18 NOPR, p. 39.
6

C. Calculating Market Shares
Computation 	of 	an 	HHI 	presumes 	the 	existence 	of 	conceptually
appropriate 	geographic 	and 	product 	markets. 	Both 	the 	FTC 	and 	the
Department 	of 	Justice 	(DOJ) 	use 	the 	HHI 	In 	assessing 	the 	competitive
signif ica nce 	of 	proposed 	mergers. 19 	The 	1984 	DOJ 	Merger 	Guidelines
describe a process for defining geographic and product markets for purposes
of calculating an HHI. 	The Merger Guidelines define a geographic market 20
as an 	area 	where a 	monopolist (or a group of 	rival 	firms 	that colludes to
behave like a monopolist) could 	profitably impose a "small, but significant
and 	nontransitory" 	increase ,in 	price above 	the 	competitive level. 	That is,
the 	Guidelines 	ask 	whether 	this 	price 	increase 	could 	be 	imposed 	without
inducing a significant number of buyers to shift to firms outside the area or
inducing a significant number of sellers outside the area to begin selling 10
the 	area. 21 	Similarly, 	under 	the 	Merger 	Guidelines, 	a 	relevant 	product
19 See 	B.F. Goodrich Co .. FTC Docket 	No. 9159, slip op. 	at 45 (March
15, 	1988); "Merger Guidelines 	Issued 	by Justice Department, June 	14, 	1984,
and 	Accompanying 	Policy Statement," Antitrust and Trade 	Regulation Report
Special 	Supplement, 	No. 	1169, 	June 	14, 	1984. 	See 	also 	"Federal 	Trade
Commission 	Statement Concerning 	Horizontal 	Mergers," 	Antitrust 	and 	Trade
Regulation Report Special Supplement. No. 1069, June 	17, 1982 (the FTC and
its staff will give considerable weight to the DOJ Guidelines in evaluating
horizon tal mergers.).
20 See § 2.3 of the Merger Guidelines.
21 As 	the 	FTC 	recently 	observed, 	the relevant 	geographic 	market 	can
also 	be 	determined 	by 	"measuring 	cross-elasticities 	of 	supply 	and 	demand;
that is, by determining the degree to which -- within a given period of time
-- price 	changes 	in 	one 	area 	will 	induce 	changes 	in 	the 	quantities 	of 	the
relevant product demanded in and supplied from other areas, with all other
factors 	affecting supply 	and 	demand 	held 	constant." 	B.F. Goodrich 	Co .. No.
D9159, slip op. at 13 (March 15, 1988). 	The Merger Guidelines approach and
the "cross-elasticities" approach are quite similar, since high cross-elasticities
imply a high demand elasticity. 	For a more detailed comparison of the two
approaches, 	see 	Landes 	& 	Posner, 	"Market 	Power 	in 	Antitrust 	Cases," 	94
Han'. L. Rev. 937, 961 at n. 43 (1981).
7

market is one in which a firm (or group of colluding firms) could profitably
impose a "small but significant and non transitory increase in price" without
inducing a significant shift of purchases to substitute products or inducing a
signif ican t 	number 	of 	man ufacturers 	to 	produce 	the 	product. 22
Opera tionall y, 	the 	term "significant and 	non transitory" 	is 	often 	in terpreted
as a five percent price increase lasting one year. 23
When calculating HHIs for merger analysis, the FTC and DOJ normally
attempt 	to identify all of the likely alternatives for customers in the event
that the merging firms attempted to raise prices above competitive levels. 24
Failure to include all 	relevant 	alternative sources of supply 	in 	the market
will 	generally 	result 	in 	an 	exaggerated 	estimate 	of 	the 	HHI, 	and 	an
overestimate 	of 	the 	likelihood 	that 	collusive 	behavior 	could 	be 	sustained
subsequent 	to 	the consummation 	of 	the 	transaction. 25 	If 	FERC's 	proposed
22 See 	Merger 	Guidelines, 	§ 	2.11. 	As 	the 	FTC 	observed 	in 	B.F.
Goodrich, the relevant product market can be determined by "measuring the
degree 	to 	which 	-- 	within 	a 	given 	period 	of 	time 	_. 	price 	changes 	of 	a
given product or service will induce changes in the quantities of a second
product or service that are supplied or demanded." Slip op. at 15.
23 In 	the 	case 	of 	a 	transportation 	tariff, 	it 	may 	be 	appropriate 	to
consider 	a 	larger 	increase 	in 	price. 	The 	Merger 	Guidelines 	(§ 	2.11, 	n. 	7)
state 	that 	"a 	larger 	increase 	may 	be 	appropriate 	if 	the 	'price' 	to 	be
increased is a 	tariff or commission that constitutes a small fraction 	of the
price 	of 	the 	product 	being 	transported 	or sold." 	Also see Charles 	Untiet,
"The Economics of Oil Pipeline Deregulation: A Review and Extension of the
DOJ 	Report," 	U.S. 	Department 	of 	Justice, 	Antitrust 	Division, 	Economic
Analysis Group Discussion Paper No. 87-3, May 22, 1987.
24 See § 2.0 of the Merger Guidelines.
2S In principle, instances could arise where the omission of a relevant
supply source causes an 	understa tement of 	ma rket concentra tion. 	Suppose,
for example, that FERC erroneously assumes that only one pipeline (which
has sold all 	100 units of its capacity to ten equal-sized customers) provides
service 	to 	a 	particular 	market, 	when 	actually 	there 	is 	a 	second 	pipeline
(which has sold all 	100 units of its capacity to a single customer) capable of
serving the market. 	If FERC defines the market to consist only of the first
8

capacity brokering rule is adopted, we believe that it will be important for
FERC to adopt procedures that avoid the systematic misstatement of market
concen tra tion. 	Computing 	HHIs 	using 	only 	data 	on 	current 	owners 	of
transportation capacity could, in some instances, overstate concentration and
the 	likelihood 	of 	colI usion. 	In 	identifying 	those 	parties 	whose 	capacity
should be included in the relevant market, it is important to note that firm
transportation 	capacity 	is 	an 	input 	into 	the 	provision 	of 	an 	assured 	gas
supply. 	If customers have access to competitively-priced alternative sources
of assured 	gas deliveries 26 (i.e., 	in 	addition 	to 	firm 	transportation services
purchased from brokers), these alternatives would act as a constraint on the
exercise of market power by firm transportation brokers, and thus should be
taken 	into 	account 	when 	measuring 	concentration. 	These 	options 	could
(under 	certain 	circumstances) 	include 	interruptible 	service,27 	as 	well 	as
"system sales"28 of gas.
pipeline, 	the 	HHI 	would 	equal 	1,000 	( 	= 	10(10)2).
however, would be 2,750 ( = 10(5)2 + (50)2).
26 Since the 	broke ring 	agreements 	may often 	be
the 	constraints 	on 	brokers' 	market 	power 	would
alternative sources of short-term gas deliveries.
The 	correct 	HHI,
short-term 	in 	na tu re,
possibly 	consist 	of
27 For example, a customer might be able to arrange for 	interruptible
transportation on a number of different pipelines. 	Although the customer's
deliveries from anyone of those pipelines could be interrupted at any time,
the 	probability 	that 	all 	of 	the 	pipelines 	would 	simultaneously 	interrupt
deliveries 	may 	be quite 	low. 	This level 	of supply assurance 	might 	be an
acceptable substitute for firm service on a single pipeline.
Interruptible service 	might 	also represent 	a competitive 	alternative 	to
firm service in markets where peak period capacity utilization tends to be low.
28 The 	term "system sales" 	of gas 	refers 	to 	gas 	that 	is 	owned (rather
than 	simply 	transported) 	by a 	pipeline and 	is 	resold 	to 	others (along 	with
the corresponding transmission services).
9

Limiting 	the 	list 	of 	market 	suppliers 	solely 	to 	current 	owners 	of
transportation capacity may also overstate concentration if doing so ignores
reasonably 	predictable 	forthcoming 	changes 	in 	the 	market. 	For 	example,
under 	the 	terms 	of 	FERC 	Order 	Nos. 	436/500, 	customers 	who 	have
contracted 	for 	firm 	sales 	rights are entitled 	to convert a 	portion 	of 	those
righ ts 	to 	tra nsporta tion 	righ ts. 	When 	sales 	rights 	are 	converted 	to
transportation 	rights, 	the 	customer 	forgoes 	its 	entitlement 	to 	purchase
system gas from the pipeline, but gains an entitlement to buy transportation
services. 	For example, in each of the next five 	years a customer might· be
able to convert 20 percent of its current firm sales rights to transportation
rights, 	until 	all 	of 	its sales rights 	have been converted.29 	The amount 	of
sales capacity that would be converted to transportation capacity during an
appropriate 	time 	(e.g., 	one 	year) 	in 	response 	to 	an 	anticompetitive 	price
increase, 	and 	could 	thus 	be 	brokered, 	should 	be 	included 	in 	the 	HHI
calculations. 	Care 	must 	be 	exercised 	in 	carrying 	out 	this 	adjustment,
however. 	The HHI and the likelihood of collusion could also be understated
if, for example, one overestimated the volume of sales rights that would be
converted 	to 	transportation 	rights 	in 	response 	to 	a 	supracompetitive
brokerage price.
Thus, 	while 	a 	safe 	harbor 	approach 	offers 	significant 	benefits, 	care
should be taken when defining markets for the purpose of calculating HHls.
Any 	mechanical 	computation 	of 	market 	shares 	that 	does 	not 	properly
identify all competitors could lead to HHI statistics that either overstate or
understate concentration and the likelihood of collusion.
29 As the 	NOPR 	(pp. 	15-16) states, 	the 	percentage of sales 	rights that
can be converted may depend on a settlement approved by FERC.
10

D. Assessing Competition Above Threshold Concentration Levels
The NOPR does not describe how FERC intends to proceed in instances
where 	market concentration exceeds 	the safe 	harbor 	threshold. 	Will 	price
caps automatically be imposed, or will FERC conduct a further inquiry into
the competitive conditions in the market? 	Depending on the threshold HHI
ultimately 	chosen 	by 	FERC, 	many 	markets 	that 	do 	not 	Qualify 	for 	safe
harbor 	status 	may 	nonetheless 	be 	competitive. 	Even 	in 	concentrated
markets, other factors may be present that constrain the exercise of market
power. 	The 	Merger 	Guidelines 	and 	the 	FTC 	Horizontal 	Merger 	Statement
discuss the nature and significance of these factors at some length. 30 	Here
we 	discuss 	what 	may 	be 	the 	most 	important 	of 	these 	factors: 	the 	ease 	of
entry.
It is a well-established antitrust principle that anticompetitive behavior
is unlikely to be sustained when entry is easily accomplished. 	As the FTC
noted 	in 	B.F. Goodrich, "[t)he absence 	of 	barriers or 	impediments 	to entry
makes 	it 	highly 	unlikely 	that 	a 	merger 	or 	acquisition 	will 	have
anticompetitive effects, because any effort to extract supracompetitive prices
and 	profits will 	induce new entry, which 	will 	reduce prices 	to competitive
levels." 31 	Under the method embodied in the Merger Guidelines, the agency
examines the "likelihood and probable magnitude of entry 	in response to a
30 See 	§ 	3.2 of 	the Guidelines ("Factors 	Affecting 	the 	Significance of
Market Shares and Concentration"), and 	§ 	III of the FTC Merger Statement
("Non-Market Share Considerations").
31 B.F. 	Goodrich 	Co., 	Slip 	op. 	at 	27. 	Also 	see 	§ 	3.3 	of 	the 	Merger
Guidelines.
I I

'small 	but 	significant 	and 	nontransitory' 	increase 	in 	price."32 	A 	two-year
time 	horizon 	is 	typically 	employed 	in 	making 	this 	assessment. 	If 	it 	is
determined 	that 	sufficient entry 	would 	occur over 	this 	two-year 	period 	to
defeat an attempted anticompetitive price increase, an enforcement action is
unlikely to be brought. 33
FERC may 	wish 	to use 	a similar approach 	if it decides 	to adopt the
proposed rule. 	One constraint on the exercise of market power by capacity
brokers is the creation of new pipeline capacity, either by incumbents or by
pipelines not currently serving the market in question. 	If capacity can 	be
readily added to a market in response to an attempt to raise price above the
competitive 	level, 	then 	such 	entry 	would 	likely 	deter 	price 	increases,
making price caps unnecessary. 	Under such circumstances, the HHI would
exaggerate 	the 	market 	power 	of 	incumbents, 	and 	could 	induce 	FERC 	to
impose price caps when none are actually necessary. 	Consideration by FERC
of 	the 	likely 	entry 	of 	other 	pipelines 	in 	response 	to 	such 	price 	increases
would give a more accurate assessment of market competitiveness. 	Research
conducted 	by 	the 	FTC 	staff 	suggests 	that 	pipelines 	in 	some 	highly
concentrated markets may face a sufficient threat of expansion from nearby
pipelines to render sustained anticompetitive behavior unlikely.
32 See Merger Guidelines, § 3.3.
33 If some firms can enter within one year, FERC may wish to follow
the Merger Guidelines' approach and classify them as being "in the market."
Under -this procedure, 	the agency would attempt to estimate the volume of
output that these entrants could sell in the relevant market, and adjust the
market 	shares 	and 	HHI 	calculations 	accordingly. 	Whether 	a 	firm 	is
categorized 	as 	an 	"entrant 	within 	one 	year," 	rather 	than 	as 	a 	current
supplier, is 	not 	particularly 	important, since the implication is the same in
both cases: the firm 	presents a constraint on 	the exercise 	of market power
by the other firms in the market.
12

We 	believe 	that 	FERC 	may 	be 	able 	to 	distinguish 	between 	markets
where potential entrants ensure competition, and where they do not. 	To do
so, 	potential 	entrants 	must 	be 	identified. 	Potential 	entrants 	are 	nearby
suppliers 	who are 	large enough (separately or collectively) to 	undermine 	a
hypothetical 	cartel 	of 	current 	market 	suppliers 	by 	offsetting 	the 	output
reduction 	that 	permits above-competitive 	pricing and 	creates 	the 	monopoly
profits 	of 	the 	dominant 	firm 	or 	cartel. 	Firms 	are 	considered 	"nearby" 	if
they 	are located sufficiently close 	to a 	market to make a 	pipeline hookup
economica 11 y f easi ble.34
When 	analyzing 	capacity 	brokering, 	FERC 	would 	determine 	which
pipelines are located sufficiently close to constrain 	the pricing behavior of
brokers 	of 	short-term 	firm 	transportation 	services. 	The 	most 	conservative
approach 	to 	determining 	the 	"nearby" 	pipelines 	(i.e., 	the 	approach 	that
places relatively little weight on the competitive impact of entry) would be
to 	assume 	that 	entrants 	expect 	to 	sign 	short-term 	(rather 	than 	long-term)
contracts 	with 	customers 	when 	entrants 	build 	a 	pipeline, 	and 	to 	further
assume that the entrants do not expect to sell services on 	these lines after
the initial contracts expire. 	Pipeline hookups that would be profitable even
if they were to be used only for this short period (e.g., three to five years)
would be regarded as imposing competitive constraints on the market power
34 Holding 	other 	factors 	constant, 	whether 	a 	pipeline 	hookup 	is
economically "feasible" depends on the length of the new pipeline hookup, as
well 	as 	on 	the 	length 	of 	the 	period 	for 	which 	the entrant expects 	to 	sell
transmission 	services 	on 	the 	new 	pipeline. 	(We 	adopt 	the 	conventional
definition of economic feasibility: projects are economically feasible when the
present 	value 	of 	the 	expected 	income 	stream 	from 	the 	project 	equals 	or
exceeds 	the 	cost 	of 	building 	the 	project; 	see 	Hirshleifer, 	Investment,
Interest 	and 	Capital, 	1970, ch. 3.) 	Pipeline 	connections are 	more 	likely 	to
be economically feasible as the pipeline's service duration increases, and as
the length of the pipeline hookup decreases.
13

of 	brokers; 	pipeline 	projects 	that 	would 	not 	be 	undertaken 	under 	these
conditions, 	by 	contrast, 	would 	not 	be 	considered 	as 	"entrants" 	for 	the
purposes of the competitive analysis. 	This approach would thus tend to limit
the 	number 	of 	"nearby" 	pipelines, 	as 	it 	would 	cause 	the 	longer 	distance
(hence higher cost) construction projects to appear less profitable.
A less conservative, but perhaps more realistic approach, would assume
that entrants believe that they will be able to find 	buyers for at least some
of 	the pipeline's services after 	the 	initial contracts expire. 	For any given
price 	increase 	by 	incumbents, 	this 	alternative 	approach 	would 	cause 	a
greater number of projects to appear profitable and thus more likely to be
undertaken. 	Consequently, this approach would attach greater importance to
the 	competitive 	effect 	of 	entry, 	and 	thereby 	cause 	fewer 	markets 	to 	be
identified as being potentially susceptible to competitive problems.
To 	be a 	potential entrant, 	the "nearby" 	pipeline 	must 	also 	be able 	to
construct its hookup within the two-year entry time period. 	Data received
from 	FERC suggests 	that 	projects can sometimes 	be completed 	within 	two
years. 35 	For example, the proposal to construct the Ozark Gas Transmission
System 	contemplated 	a 	three 	month 	construction 	period. 	The 	proposed
pipeline system included 285 miles of 20-inch transmission line, and 170 miles
of 	4-inch,6-inch, 	8-inch, 	and 	to-inch 	lateral 	lines 	with 	an 	estimated
capacity 	of 	] 70,000 	Mcf 	per 	day.36 	Construction 	actually 	took 	about 	6
months 	(early 	August 	1981 	to 	la te 	January 	]982). 	Transporta tion 	services
35 See, for example, Federal Energy Regulatory Commission, Office of
Pipeline 	and 	Producer 	Regulation 	Staff 	Report, 	Cost 	of 	Pipeline 	and
Compressor 	Station 	Construction 	Under 	Natural 	Gas 	Act 	Section 	7( c) 	for 	the
Years 1982 through 1985, pp. I-IV, (no date).
36 Ozark Gas Transmission System, Docket No. CP78-532, 	] 6 FERC par.
6],099 (October 9,1981), p. 6],190.
14

began on March 	I, 	1982. 37 	If the planning of this project took 	18 months
or less, 	then it would seem that all of the steps required 	for 	entry 	into a
market (aside from satisfaction of regulatory requirements, a point discussed
below) could sometimes be completed within the 2-year time period stipulated
in the Merger Guidelines.
The threat of entry will deter the exercise of market power only if all
entry 	requirements, 	including 	regulatory 	requirements 	(e.g., 	FERC 	entry
certificates) can be satisfied within the relevant (e.g., two-year) time period.
In 	the 	preceding example, 	Ozark 	first 	applied 	for 	its 	FERC certificate 	in
September 	1978, but FERC did 	not issue the order granting the certificate
until 	July 	1981, 	thus 	delaying 	entry 	for 	three 	years. 	Such 	regulatory
proceedings 	can 	be 	quite 	time 	consuming; 	however, 	the 	length 	of 	this
regulatory 	lag 	is 	partially 	(though 	not 	completely) 	subject 	to 	FERC's
controt. 38 	We recommended in a previous FERC proceeding 39 that FERC not
allow 	participants 	threatened 	by 	competition 	(e.g., 	incumbent 	suppliers
threatened by entry) to use FERC's regulatory powers to frustrate and delay
the 	consummation 	of 	procompetitive 	transactions.4o 	If 	firms 	do 	not
37 Ozark 	Gas 	Transmission 	System, 	Docket 	Nos. 	CP78-532-000, 	CP82-
416-000, 	CP78-532-008, 	and 	CP82-129-001, 	22 FERC 	par. 61,334 	(March 	21,
1983), pp. 61,575-576.
38 Other regulations (e.g., state environmental codes) may also delay or
impede the construction of interstate gas pipelines.
39 	See 	Motion 	of 	the 	Federal 	Trade Commission 	Staff 	for 	Leave 	to
Intervene 	(And 	Attached 	Staff 	Comments), 	In 	the 	Matter 	of 	Texas 	Gas
Transmission Corporation, Docket No. CP87-205-000, July 30, 1987.
40 In 	its 	opinion 	and 	order 	on 	the 	Ozark 	matter, 	FERC 	noted 	that
"Arkla [a 	competitor of Ozark] 	has 	made 	more 	objections to 	Ozark's 	rates
than any other party." Ozark Gas Transmission System 63 FERC 61,099 n. 15.
15

experience 	undue regulatory delay, 	then the threat of entry 	will 	present a
much more effective constraint on the exercise of market power by brokers.
IV. Conclusion
We 	believe 	that 	FERC's 	proposal 	to allow capacity 	brokering 	has 	the
potential to increase economic efficiency in gas transportation 	markets and
thereby to benefit consumers. 	A competitive analysis similar to the one used
by the FTC in its merger investigations could help FERC identify workably
competitive brokering markets. 	These comments have attempted to illustrate
how FERC might employ the FTC method.
16