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Court Deals Blow to Munis' Lawsuit Against Major Producers

A district court judge in Washington, DC has blown a major hole in a lawsuit brought by a coalition of 18 Midwest municipal gas utilities accusing five major natural gas companies of engaging in activities to "control and unlawfully" raise the price of gas in the United States in restraint of trade or commerce.

The lawsuit was filed in mid-2004 in the U.S. District Court for the District of Columbia. Thirteen municipal gas utilities in Kansas, two in Missouri, and one each in Indiana, Texas and Illinois alleged that ExxonMobil Corp., BP America, Shell Oil's Coral Energy Resources, ChevronTexaco Corp. and ConocoPhillips committed violations of the Clayton Act and Sherman Act.

All of the companies or their parent firms were members of the National Petroleum Council (NPC), which produced reports about natural gas supply-demand in 1999 and 2003. The gas municipals alleged that the producers involved in the 2003 NPC study painted a false picture in that report. Producers agreed in the report that "current and higher gas prices were the result of a fundamental shift in the supply and demand," but the report gave no evidence that the existing total resource base of natural gas in the United States and Canada had shrunk since late 1999, when the previous NPC gas report was issued, the lawsuit said.

In a second supplement to their original 2004 complaint, the municipals refuted claims of a gas supply shortage. Technically recoverable gas resources are currently 1,769.6 Tcf, representing a 80.9-year supply of gas, they said. Working gas in storage was 3,177 Bcf at the end of September 2006.

Judge Richard W. Roberts dropped Chevron Texaco from the lawsuit, saying that the municipals failed to show that the court had "personal jurisdiction" over the oil and gas company. While the gas municipals "allege that ChevronTexaco has an office here permanently staffed by a vice-president, they do not allege additional facts showing that ChevronTexaco directly conducts business in the District of Columbia," he said in a nearly 50-page opinion.

Roberts also granted Coral Energy's motion to be excluded from the lawsuit. "[Municipals] may not seek damages from Coral in this action stemming from the rates that Coral charges for natural gas over which FERC maintains exclusive jurisdiction."

While the court let stand the gas municipals' allegations of price fixing, it said the municipals failed to make a case for monopolization, attempted monopolization, conspiracy to monopolize and/or price discrimination with respect to any of the gas companies. As a result of Roberts' decision, BP America, ConocoPhillips and ExxonMobil are the remaining defendants in a significantly watered-down lawsuit.

The municipals allege that the producers "have undermined [their] effort to provide natural gas at affordable prices to users in their markets because the defendants have conspired to restrain trade or commerce and have acted to monopolize and increase the prices of natural gas," according to the judge's ruling.

Roberts, in striking the monopoly allegation, said the municipals "do not allege that any one defendant unilaterally acted to monopolize or attempted to monopolize. [Municipals] have alleged only that the defendants together have a market share of 70%, and that they together have withheld supply of natural gas to monopolize or attempted to monopolize the market. This shared monopoly argument is insufficient to state a claim that defendants have monopolized or attempted to monopolize the natural gas market."

Although the municipals "assert in a conclusory fashion that 'defendants have...the specific intent of monopolizing the market,' they have failed to allege any facts to support that claim," he said. Nor, Roberts added, had the municipals "sufficiently alleged that defendants conspired to monopolize the natural gas retail market."

To sustain the allegation of price discrimination, the court said the municipals had to show several things: 1) two or more consummated sales; 2) reasonably close in point of time; 3) of like grade and quality of commodity; 4) with a difference in price; 6) by the same seller; 7) to two or more different purchasers; 8) for use, consumption or resale within the United States or any territory thereof: and 9) which may result in competitive injury.

But the municipals' claim of price discrimination fell short on several counts, the court said. "It fails to allege 'two or more consummated sales...reasonably close in point of time'...It does not allege that any defendant made a sale of natural gas to any [municipal]. The omission of an actual sale to a plaintiff is fatal."

In letting stand the price-fixing charge, Roberts said the municipals had "sufficiently alleged" that the producers agreed to fix prices in violation of the Sherman Act. "First, the facts alleged concerning the high price of natural gas could support an inference that defendants conspired to raise prices to reap the enormous benefits described by [municipals]. Second, facts alleged about the amount of proved reserves and the total use of natural gas could support an inference that [producers] falsified their statement about the shortage of natural gas to increase their profits," he noted.

The court rejected the producers' claims that their membership in the NPC shielded them from any antitrust liability. The producers argued that they were protected under the so-called Noerr/Pennington doctrine, which exempts from antitrust liability parties who associate together to persuade the legislature or executive branch to take particular action with respect to a law that would produce a restraint or a monopoly. The NPC is an advisory committee to the secretary of the Department of Energy.

But Roberts ruled that the municipals' allegation that the producers attempted to artificially inflate the price of natural gas can be construed "only as a private action," not subject to Noerr immunity.

In their 2004 lawsuit, the gas municipals asked the court to grant them monetary relief equal to three times the damages allegedly incurred by them as a result of the producers' alleged actions.

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