The U.S. Court of Appeals for the Seventh Circuit told a lower court last week to take another look at whether ProLiance Energy wields overwhelming market power in the Indiana gas market, a charge that was dismissed in 2000. ProLiance has been in and out of court over the past six years over similar charges.

“It may be that a fresh look will lead to the same conclusions reached six years ago, but nothing in the agency’s decision prevents a federal court from taking that fresh look in antitrust litigation,” the Seventh Circuit said.

The case was first brought by United States Gypsum Co., which claimed that ProLiance is an “unlawful combination” that by contract controls a “substantial fraction” of the transport capacity between gas producing fields and Indiana. USG said ProLiance has used its market power to monopolize the market for gas deliveries. USG purchases substantial quantities of gas for use in manufacturing. It buys gas at the wellhead and deals directly with pipelines for transportation.

Indiana Gas Co. and Citizens Gas & Coke, two utilities that supply natural gas to customers in Indiana, formed a joint venture in 1996 (called ProLiance Energy) to manage their gas purchase and pipeline transportation agreements. In September 2000, the Indiana Supreme Court overturned an appeals court verdict and affirmed a Sept. 12, 1997 order of the Indiana Utility Regulatory Commission (IURC) that the gas supply agreements between utilities Indiana Gas and Citizens Gas and Coke and ProLiance Energy are in the public interest (see Daily GPI, Sept. 26, 2000).

Under the current appeal, USG contends that even though it buys transportation directly from the pipelines, the price the pipelines can charge for their services depends on what ProLiance has done with its portion of the capacity. According to USG, pipelines have been able to charge more for their residual capacity because of ProLiance’s existence (and practices) than the pipelines would have been able to charge in its absence.

USG holds that Indiana Gas and Citizens Gas have many customers with firm entitlements to gas. In order to assure delivery, Indiana Gas and Citizens Gas purchase more pipeline capacity than needed for daily deliveries; they hold the excess as reserve for the benefit of the un-interruptible customers during periods of peak demand.

“During times of average demand, Indiana Gas and Citizens Gas sold their excess transport entitlement on the spot market, where USG bought it at attractive prices and used it to secure gas that it stored for times when spot market prices were high,” USG said. “After ProLiance came into existence, however, it ended (or at least greatly curtailed) these spot-market sales, forcing USG to pay more for firm capacity from the pipelines (firm commitments always sell for more than interruptible or spot purchases).”

ProLiance claims that by managing purchases on behalf of both Indiana Gas and Citizens Gas, it has “achieved efficiencies.” When one utility’s demand peaks, the other’s may be closer to normal, which means that less aggregate reserve capacity is needed. “This is the way in which an insurer, by pooling many imperfectly correlated risks, creates a portfolio that is less risky than any insured standing alone,” ProLiance contends. Because of this, ProLiance claims it needs less standby capacity for peak periods and can provide more firm, un-interruptible commitments per unit of pipeline capacity than either Indiana Gas or Citizens Gas could do on its own. An increase in demand from the utilities’ customer base then can be met without an increase in price. However, third parties such as USG find fewer bargains in the spot market.

Disputing ProLiance’s claims, USG believes that the higher spot-market prices stem not from risk pooling but from ProLiance either holding reserve capacity off the market (a reduction in output that drives up prices) or bundling the release of reserve transport capacity with gas (which USG describes as a monopolistic tie-in sale).

Noting the previous findings that ProLiance lacked market power in 1997, the Seventh Circuit said things can change. “More than six years have passed since then,” the court said. “What is ProLiance doing today? It does not take a leap of fancy to envisage a joint venture behaving itself long enough to win regulatory approbation, and only then applying the squeeze in the market.

“Because all we have to go on is USG’s complaint, it is too soon to determine whose understanding of these events is superior,” the Seventh Circuit added. The court noted that the district judge who first heard the case concluded that it would never be necessary to examine these issues and dismissed the complaint on three grounds:

“None of these is a good ground on which to dismiss USG’s complaint — and the latter two are not permissible even in principle, because the statute of limitations and issue preclusion are affirmative defenses,” said the Seventh Circuit.

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