United States v. El Paso Natural Gas Company

PETITIONER:United States
RESPONDENT:El Paso Natural Gas Company
LOCATION:Taylor Street Pharmacy

DOCKET NO.: 94
DECIDED BY: Warren Court (1962-1965)
LOWER COURT:

CITATION: 376 US 651 (1964)
ARGUED: Feb 25, 1964 / Feb 26, 1964
DECIDED: Apr 06, 1964

Facts of the case

Question

  • Oral Argument – February 26, 1964
  • Audio Transcription for Oral Argument – February 26, 1964 in United States v. El Paso Natural Gas Company

    Audio Transcription for Oral Argument – February 25, 1964 in United States v. El Paso Natural Gas Company

    Earl Warren:

    Number 94, United States, Appellant, versus El Paso Natural Gas Company, et al.

    Mr. Solicitor General.

    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.

    Archibald Cox:

    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.

    Potter Stewart:

    When was the earlier plan abandoned?

    1955?

    Archibald Cox:

    1954 — there was a —

    Potter Stewart:

    1954 —

    Archibald Cox:

    — very preliminary discussions in 1954, then there’s 1954, a three-way deal.

    I think it fell through during 1954.

    Potter Stewart:

    And does the record show why it fell through?

    I suppose (Voice Overlap) —

    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.

    William J. Brennan, Jr.:

    (Inaudible) it’s talking about now, is that something else?

    Archibald Cox:

    I’ll come to that in a minute.

    I haven’t mentioned that yet.

    William J. Brennan, Jr.:

    Is that the one that deals with (Voice Overlap) —

    Archibald Cox:

    That’s still another proposal that involved the perspective use of Canadian gas.

    William J. Brennan, Jr.:

    But I thought — I think you said that the Edison transaction would’ve required the construction of a pipeline?

    Archibald Cox:

    Yes.

    William J. Brennan, Jr.:

    I see.

    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.

    Archibald Cox:

    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 —

    Potter Stewart:

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

    Archibald Cox:

    If I hadn’t, I was going to say it in the next sentence.

    Potter Stewart:

    Well, you sent a letter to us last spring or summer.

    Archibald Cox:

    It was.

    Potter Stewart:

    Yes.

    Archibald Cox:

    No question about it.

    Potter Stewart:

    Yes.

    I — I misunderstood you.

    Archibald Cox:

    I’m — I’m just saying this —

    Potter Stewart:

    It was going to be that.

    This was planned (Voice Overlap) —

    Archibald Cox:

    No, these are mostly planned.

    Potter Stewart:

    Yes.

    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.

    (Inaudible)

    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.

    Archibald Cox:

    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.

    Archibald Cox:

    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.

    Archibald Cox:

    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.

    Archibald Cox:

    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.

    Arthur J. Goldberg:

    (Inaudible)

    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 —

    Arthur J. Goldberg:

    (Inaudible)

    Archibald Cox:

    Well, I can’t —

    Arthur J. Goldberg:

    (Inaudible)

    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.

    Arthur J. Goldberg:

    (Inaudible)

    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.

    Arthur J. Goldberg:

    (Inaudible)

    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.

    Arthur J. Goldberg:

    (Inaudible)

    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.

    Archibald Cox:

    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)

    Potter Stewart:

    Yes.

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

    Archibald Cox:

    I was hoping you would say (Inaudible).

    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.

    Archibald Cox:

    But —

    Potter Stewart:

    Wasn’t going to be racing, wasn’t going to be competing.

    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 —

    Arthur J. Goldberg:

    (Inaudible)

    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.

    Arthur J. Goldberg:

    (Inaudible)

    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.

    Arthur J. Goldberg:

    (Inaudible)

    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.

    Arthur J. Goldberg:

    (Inaudible)

    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.

    Arthur J. Goldberg:

    (Inaudible)

    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.

    Arthur J. Goldberg:

    (Inaudible)

    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.

    Arthur J. Goldberg:

    (Inaudible)

    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.

    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.

    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 —

    You mean that’s the wrong conclusion, that’s the wrong facts.

    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.

    Earl Warren:

    We’ll recess now.