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without delay" ordered. However, there was still a number of difficult tasks to be performed before divestiture could actually be effected. Negotiations were required to resolve issues which the court had left open such as the purchase price to be paid and the disposition of nonutility assets. Thereafter, months were spent restructuring the long term debt to be assumed by the new company.' Terms and conditions of new bonds and debentures had to be agreed upon and the complex documents then printed and signed by over ninety institutions. The printing bill alone for these debt instruments exceeded 12 million dollars and El Paso had an even larger bill for printing new instruments that it required. Also, during this final period, the staffing of key positions, structuring of organiza. tional charts and final development of operational plans had to be completed, together with the creation of detailed accounting procedures and computer programs.
The substantial expense involved in the prosecution of the El Paso case from its initiation in July of 1957, until divestiture was finally achieved in February of 1974, has never been publicly documented. Colorado Interstate expended a total of $242 million as an applicant in both of these divestiture proceedings. The Apco Group, the ultimately successful applicant, expended over $1 million in only the final hearings in Divestiture III. The cost of organizing Northwest Pipeline and structuring it for divestiture exceeded $2 million with additional long term debt roll-over costs of approximately $850,000 and an FPC Aling fee of approximately $200,000 for the required certificate.
In addition to the lengthy and expensive court hearings and the extended period thereafter before divestiture could be effected, there were also activities concerning this case in both the Senate and House of Representatives of the United States Congress with attendant expenditure of substantial sums. On several occasions El Paso attempted to preserve the illegal merger by promoting special interest legislation in the form of a "Forgiveness Bill". Prolonged uncertainty as to when divestiture would take place, who would acquire the divested properties, and what gas supply the acquiring firm would have caused great anxiety in the western gas markets. Because of this understandable concern and the mounting skepticism that a satisfactory divestiture would ever be accomplished considerable support developed for this special legislation.
This support was, of course, organized and orchestrated by El Paso which, with its great resources, was able to muster an impressive political effort that almost succeeded in obtaining the special bill. The bill's supporters argued that competition could not be re-created after years had passed and market conditions had changed and that the divestiture would create two weak utilities while destroying a strong one to the prejudice of the public interest. These contentions, although contrary to the evidence presented in the divestiture proceedings, were widely accepted. One discerning voice likened the pleas for special legislation to the situation where a burglar pleads to keep stolen goods because he can put them to greater advantage than the true owner.
I am happy to report that the new company created by the long-delayed divestiture is alive and well and that none of the ominous predictions materialized. While “divestiture without delay" was not achieved, I believe the fundamental goal of antitrust policy was finally fulfilled by re-establishment of the status quo anti acquisition. However, the extraordinary expenditure of time and resources devoted to this effort makes one wonder if there isn't a better way to effectuate the important public policy of 8 7 of the Clayton Act. While there is no tally of the total cost in obtaining divestiture, it ran into many millions, employed for years dozens of lawyers, accountants and others, consumed great quantities of the scarce judicial and law enforcement resources and permitted a noncompetitive market structure to exist for a decade after that market structure had been declared unlawful by the high Court. Another uncalculable cost was incurred by the diversion of substantial time and energy of key El Paso executives from their important duties of running a major utility and developing new sources of energy supplies because of the inordinate demands made upon them in the defense of this antitrust proceeding.
There are a number of reasons supporting this proposed legislation, but the avoidance of the necessity of an extended, costly divestiture proceeding is certainly one of the most important, Divestiture is, at best, a difficult remedy, with an inherent risk that it will not succeed. Nevertheless, divestiture where feasible, is in most instances, the only truly effective remedy for consummated violations of $ 7 of the Clayton Act because it is the only possible way to restore something close to the premerger competitive situation.
In International Salt Company v. United States, Justice Jackson pointed out. the importance of securing such effective relief from trade restraints in antitrust cases :
"A public interest served by such civil suits is that they effectively pry open to competition a market that has been closed by defendant's illegal restraints. If this decree accomplishes less than that, the government has won a lawsuit and lost a cause.
Unfortunately, a number of cases reveal a clear victory in the battle of proving & violation, but something far less than victory in the vital remedial phase, the goal of antitrust enforcement.
While new legislation to improve antitrust enforcement is necessary, it must be carefully considered and constructed because all mergers and acquisitions are not anti-competitive and, in fact, some are pro-competitive and economically desirable. Therefore, such activity should not be unduly inhibited. It is necessary that the government's challenge of acquisitions and mergers which appear to threaten competition should be based upon an informed understanding of the facts to the fullest extent possible. This requires the divulging of information by the parties and a reasonable opportunity for government review. Furthermore, a court should have an adequate rec rd on which to exercise its discretion to prohibit or allow the consummation of acquisition or merger pending final judgment. Finally, it is necessary for effective antitrust enforcement that the profits and advantages of an unlawful acquisition should, to the fullest extent possible, be removed. I believe that your bill as drafted, adequately fulfills these needs.
If the eggs of a potentially unlawful acquisition or merger can be kept unscrambled and the economic incentives of pursuing such acquisitions and mergers or of delaying any subsequently ordered divestiture can be minimized or removed, the El Paso experience may become an object of historical curiosity rather than an unfortunate and exaggerated example of the necessary course of a divestiture proceeding.
TESTIMONY OF DAVID K. WATKISS, ESQ., WATKISS & CAMPBELL,
SALT LAKE CITY, UTAH Mr. WATKISS. Thank you, Mr. Chairman. Mr. FLOWERS. I think we will probably have some questions for you afterwards. Had we had this legislation over these last 20 years, you might not be with us here today. But we certainly want to welcome you in the obvious event that we have not had this legislation for 20 years.
You may proceed as you see fit.
Mr. WATKISS. Thank you, Mr. Chairman. I am a lawyer from Salt Lake City, Utah, who tries a variety of lawsuits and I do not hold myself out as a particular expert in antitrust.
I happened to be retained as chief trial counsel by the ultimately successful applicant in the El Paso case and spent 7 interesting years learning all about divestiture. The case, with which I am sure you are all familiar, was a very important enforcement action. It has been discussed and reviewed in many articles and featured in many seminars and speeches.
The Wall Street Journal had an interesting characterization of it called "Antitrust Gone Mad." This case, however, involved most of the classic issues you find in divestiture cases and provided me and many other people with a concentrated, practical course in the problems of divestiture.
If the Eisenhower effort had succeeded some years ago and we had put on the books at that time legislation of the type you are considering, the 17-year saga of the El Paso case would not have come about, and the public would have been spared that long ordeal.
Prior notification that the El Paso, the major western interstate pipeline, was about to acquire Pacific Northwest, the only other interstate pipeline in the West, would in my opinion have produced an injunction staying the merger and thus the prevention of the ensuing 17-year restraint of competition in the western natural gas markets.
An effort by the Department of Justice to obtain a restraining order when El Paso's stock acquisition of Pacific Northwest was announced was denied by the trial court even though the Supreme Court, when it reached the merits of the merger in 1964, unanimously found in so many words that "if El Paso can absorb Pacific Northwest without violating section 7 of the Clayton Act that section has no meaning in the natural gas field.”
If there had then been no merger, the case would have ended there, but another 10 years were required to accomplish the Supreme Court order requiring “divestiture without delay.". Despite this prolonged and unsupportable delay, the El Paso case, I believe, had a salutory effect because the business community observed the Justice Department and the courts persevere until a satisfactory remedy was finally achieved.
A brief description of the history of this divestiture case illustrates why legislation such as you are considering is needed to avoid the damage to the public interest that results from years of protracted litigation, during the course of which a monopolistic or anticompetitive condition was allowed to continue, because there were no effective means at the outset to stop the unlawful acquisition, and no efficient means to unravel it expeditiously.
The El Paso litigation and the difficulties encountered in structuring a divestiture decree to meet the criteria required by the Supreme Court emphasize the need to avoid divestiture by maintaining the separate identities of the parties to the proposed merger while the violation is litigated, if this can be reasonably and responsibly accomplished.
While a successful divestiture was finally obtained, the period of time required, with its attendant economic uncertainties and changing market conditions, together with the considerable expense and effort needed to achieve a satisfactory result, graphically illustrates the desirability of the legislation that you are presently considering.
Prior to World War II, the California natural gas market was supplied from in-state sources. Immediately after the war, El Paso Natural Gas Co. began to supply California with gas from outside the State. California was a burgeoning market which provided a great opportunity for a small, growing company. Pacific Northwest Pipeline Corp. (PNW) was certified by the Federal Power Commission in 1955 to supply natural gas to the Pacific Northwest, particularly the States of Oregon, Washington, and Idaho.
The PNW pipeline was constructed to deliver gas supplies from the San Juan Basin in northwestern New Mexico. Supplemental sources of gas were obtained by PNW from Canada.
PNW, with an excess supply of natural gas for its new and developing market, began discussions with certain California consumers to determine if it could supply California. As soon as PNW began these discussions in the California market, El Paso, the sole supplier of gas from outside California, began looking on this new entity west of the Rockies as a possible acquiree-something that should be ob
tained if at all possible in order to maintain the California market for itself. El Paso and PNW commenced negotiations. In 1957, about a year after Pacific Northwest actually began doing business, El Paso finally acquired the PNW stock. Almost immediately the Justice Department filed a section 7 Clayton Act case contending that the acquisition substantially lessened competition in the California market.
A month after the filing by the Justice Department, El Paso applied to the Federal Power Commission for approval of an asset merger of the two companies under section 7 of the Natural Gas Act. Confusion and controversy followed over which forum should proceed first, with the district court finally deciding to wait for the Commission to proceed.
In December of 1959, the FPC approved the merger which was thereafter immediately consummated.
The State of California appealed the FPC order. In 1962 the U.S. Supreme Court vacated and remanded the case to the U.S. district court for the trial of the Clayton Act violation, holding that the Clayton Act suit against El Paso's acquisition of control should have been tried in the Federal District Court before the FPC permitted the consummation of the merger and that the regulatory authority of the FPC did not empower the Commission to immunize the transaction against antitrust attack under section 7 of the Clayton Act.
Subsequently in 1964, a unanimous Supreme Court found that the acquisition violated section 7 of the Clayton Act and, with but one dissent, ordered “divestiture without delay," and remanded the case to the district court for compliance with that mandate.
A year later, in 1965, the district court endorsed a plan of divestiture negotiated by El Paso and the Justice Department. However, this decision was appealed to the Supreme Court by three appellants, who had unsuccessfully attempted to intervene in the case to be heard on the conditions of the divestiture plan.
The Supreme Court reversed, determining that intervention should have been afforded to all persons who might be adversely affected by the disposition of the acquired property; overturned the divestiture decree; and laid down strict criteria for an effective divestiture.
Divestiture hearings began in 1967, with intervention granted at the outset to 29 new parties, including most of the Western States and all of the customers of El Paso. There were 10 applicants to acquire the new company who were required to present their respective qualifications, divestiture plan, and details on how they would operate the new company and particularly how they intended to reinstitute competition in the relevant markets.
This trial, known as Divestiture II, was lengthy, extending intermittently from mid-1967 to mid-1968 and generating some 11,000 pages of testimony. In an effort to insure the ability of the new company to acquire needed new reserves and to otherwise vigorously compete, the district court finally chose the financially strong and experienced Colorado Interstate Gás Company (CIG), the only gas pipeline operator among the applicants, to acquire the new company rather than selecting a sale to interests outside the gas pipeline industry.
This choice raised antitrust problems on its own, for the anti-competitive restraints found objectionable in the original acquisition were
likewise raised by the new company being divested to another potential competitor in the California or northwestern markets, and an actual competitor for gas supplies for such markets.
This decision was appealed to the Supreme Court and despite subsequent attempts by the parties to dispose of the appeal, the Supreme Court in an unprecedented action, again overturned the divestiture plan.
Petitions for rehearing delayed remand of the case to the district court for a year, but finally in 1970 new divestiture hearings were
commenced with the same parties, but this time with only seven applicants for acquisition.
The difficulties of establishing a new company that could compete as effectively as PNW had been able to do, some 15 years earlier, despite changed economic circumstances in the natural gas industry where competition had shifted from markets, to obtaining natural gas supplies, was manifest to all.
Lengthy hearings were again required to solve these issues, extending into 1972 and generating 9,000 pages of transcript. The district court's decision was appealed to the Supreme Court again, but this time the Supreme Court refused review and the lower court's decision became final in March of 1973,
The court proceedings were thus finally concluded some 16 years after the suit was filed and 9 years after the acquisition was held illegal and "divestiture without delay" was ordered. However, there were still a number of difficult tasks to be performed before divestiture could actually be effected.
Negotiations were required to resolve issues which the court had left open,
such as the purchase price to be paid and the disposition of nonutility assets. Thereafter, months were spent restructuring the longterm debt to be assumed by the new company.
Terms and conditions of new bonds and debentures had to be agreed upon and the complex documents then printed and signed by over 90 institutions. The printing bill alone for these debt instruments exceeded one-half million dollars, and El Paso had an even larger bill for printing new instruments that it required.
Also, during this final period, the staffing of key positions, structuring of organizational charts and final development of operational plans had to be completed, together with the creation of detailed accounting procedures and computer programs.
The substantial expense involved in the prosecution of the El Paso case from its initiation in July of 1957, until divestiture was finally - achieved in February of 1974, has never been publicly documented.
Colorado Interstate expended a total of $21,2 million as an applicant in both of these divestiture proceedings. The APCO group, the ultimately successful applicant, expended over $1 million in only the · final hearings in divestiture III.
The cost of organizing Northwest Pipeline and structuring it for divestiture exceeded $2 million, with additional long-term debt, rollover costs of aproximately $850,000, and an FPC filing fee of approximately $200,000 for the required certificates.
In addition to the lengthy and expensive court hearings and the extended period thereafter before divestiture could be effected, there