Anti-trust and regulatory issues in a competitive electric industry

Anti-trust and regulatory issues in a competitive electric industry Reinier H. J.H. Lock

This paper contains a brief synopsis of the anti-trust enforcement structure and those antitrust principles most pertinent to the regulated energy industries of the USA. A discussion of how the courts have applied anti-trust doctrine, especially to electric power, follows. The evolving role of agencies charged with economic regulation who have themselves applied antitrust principles as competition emerges is then discussed, as are the major institutional relationships, most notably between the Federal Energy Regulatory Commission (FERC) and the traditional anti-trust enforcement agencies. How FERC is applying anti-trust principles in the course of various facets of its economic regulation of these industries is analysed. Finally, in view of the enormous task facing the European Community integrating its energy markets by 1992, the article looks at the USCanadian experience of integrating their domestic energy markets under the Canada-US Free Trade Agreement (1 January 1989). Keywords: Electric

utility regulation;

Anti-trust;

Competition

This paper discusses the increasing interaction between anti-trust and regulatory principles in the US electric system as that system becomes exposed to more competition, and it brings in, where useful, lessons from a similar interaction in the US natural gas industry. The move towards competition in some parts of each of these industries, competition induced both by market forces and by regulatory changes, seems almost inexorable in the 1990s. Inevitably following such a move towards competition and increased reliance on market disciplines will be increased attention to the role of anti-trust principles in the governance of these industries. The

Reinier Lock is with LeBoeuf, Lamb, Leiby and MacRae, 1333 New Hampshire Avenue, NW, Washington DC 20036, USA.

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likelihood of continued economic regulation in lieu of market disciplines in other parts of these industries makes for a complex interaction between competition and economic regulation and makes finding the appropriate role for anti-trust principles and mechanisms especially challenging.

The basic structure of US anti-trust laws The heart of the US anti-trust laws is contained in the Sherman Act, enacted around the turn of the century, as subsequently amended by the Clayton Act. For the regulated energy industries, three major statutory sections predominate. These provisions are noted for their great simplicity in the ‘black letter law’, but for their great complexity in application. This statutory structure may not be dissimilar to the major competition provisions of the EEC Treaty, the heart of which is also contained in two simply stated Articles (85 and 86). Section 1 of the Sherman Act covers a variety of offences where market power is exercised by firms through unreasonable restraints of trade involving the joint conduct of two or more such entities. Section 2 covers single firm conduct and prohibits monopolization or attempts to monopolize. Section 7 of the Clayton Act prohibits mergers or acquisitions of stocks or assets where ‘the effect of such acquisitions may be substantially to lessen competition, or to tend to create a monopoly’. While there are many more statutory provisions in the US antitrust statutes, these three provisions encompass the vast bulk of judicial precedents pertinent to the regulated energy industries and most of the antitrust doctrine applied in the regulatory context to them.’ I will elaborate upon some of these precedents below. First, however, it is important to understand the enforcement structure. At the Federal government level, most of the enforcement of the anti-trust laws is carried out by the Antitrust Division of the Department of Justice (Justice) and by the Federal Trade Commission (FTC). The FTC operates under

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its own statute and has powers to take action on a wider range of conduct than is covered by the anti-trust laws themselves. Essentially, however, the FTC and Justice operate within the framework of common judicial precedents and a common set of principles. In practice, they tend to divide up the anti-trust enforcement field through informal understandings as to each particular industry or area of endeavour. One absolutely critical element of the US enforcement structure, which may be unique to the US. is the right of private parties injured by an alleged anti-trust violation to sue in the Federal courts for treble damages and for the recovery of attorney’s fees and cost of suit. Because of the strong financial incentives, this concept of the ‘private attorneygeneral’ has proved to be a powerful weapon in the hands of competitors, especially where the groundwork in the costly and time-consuming field of anti-trust litigation has been laid by the Federal enforcement agencies or, in some cases, where these Federal agencies have failed to act and there is a strong perceived need for anti-trust action. As we will discuss later, some of the regulatory agencies themselves, such as FERC and the Nuclear Regulatory Commission (NRC), have started to apply anti-trust principles in the course of their regulation although this is not, in the strict sense, anti-trust enforcement. In addition to enforcement at the Federal level, most States have their own anti-trust laws which tend to be enforced by State Attorney-Generals’ offices. Legislation of relatively recent vintage has given State Attorney-Generals the right to sue in the Federal courts as well on behalf of interests within their States. Generally, the government agencies have the power to seek both criminal and civil sanctions. The Federal criminal sanctions have been stiffened considerably in recent years and the possibility of spending time in Federal jail for convicted ‘white collar’ criminals in this area has become real. So the anti-trust laws are seldom viewed casually by wise businessmen. Enforcement of Section 7 of the Clayton Act was also strengthened by the enactment in 1976 of the Hart-Scott-Rodino Antitrust Improvements Act, which requires pre-notification to both Federal antitrust enforcement agencies of any planned merger or acquisition of significant size.

Anti-trust principles in the electric and natural gas industries Because

the prevailing

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industries under economic regulation has been the pervasive concentration of market power in the regulated entities - market power often created and supported by the regulators - a good deal of the judicial anti-trust focus has been upon how Section 2 of the Sherman Act applies to these industries. The offence of monopolization has been defined by the Supreme Court as the possession of monopoly power coupled with ‘the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen. or historic accident’.’ Even if the monopoly power itself is lawfully acquired, eg through a State’s grant of an exclusive franchise to a utility, the Supreme Court has held that its KYCin order to ‘gain a competitive advantage’, or to exclude a rival on grounds other than efficiency, is illegal.” Because the monopoly power in these industries is usually so obvious? most of the judicial focus has been upon the ‘conduct’ element of the offence, or upon the more fundamental issue of whether the State grant of, or protection of, the monopoly power is a defence to allegations of an anti-competitive conduct. There has been a long and complex evolution of judicial efforts to define the ‘conduct’ element of the monopolization offer. Perhaps the best summary of this evolution is found in Judge Cudahy’s famous opinion in the MCI Communications case, which is credited for helping to turn the US telecommunication industry towards the path of deregulation. In that opinion, Judge Cudahy found that the courts had ‘consistently found monopolization only in circumstances where predatory or exclusionary conduct was proven’.’ The fact that a firm has built up a dominant position in an industry through technical innovation and normal aggressive business practices is not monopolization. Indeed, the courts have stressed that to find such conduct to be monopolization would be contrary to the very competitive process which the Sherman Act is trying to promote. As the courts have stressed many times, the Sherman Act is meant to protect the competitive process, not competitors themselves.” A good deal of the focus in cases pertinent to the regulated energy industries has been upon the ‘valid business reasons’ defence. It is, for instance, of particular relevance in disputes over denials of transmission or transportation access. Hence the ‘conduct’ analysis will turn upon whether the defendant’s conduct represents fair competition on the merits as contrasted with unfair interference in the business efforts of others. Generally, the firm possessing

Anti-trust

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monopoly power is susceptible to anti-trust attack if it cannot demonstrate that its actions are motivated by efficiency considerations as opposed to a desire to insulate itself from competition. Hence, if the challenged activity, eg a denial of transmission access, forgoes short-term financial benefits or is detrimental to consumers, a showing of longer-term ‘valid business reasons’, becomes particularly important.’ Of special importance to the evolution of the increasingly competitive wholesale bulk power markets in the USA has been the so-called ‘essential facility’ doctrine. This doctrine is really a shortcut that simplifies the Sherman Section 2 analysis of the monopoly power question in a context in which the regulated company’s monopoly power emanates not primarily from an exclusive franchise territory, but rather from the company’s control of ‘bottleneck’ transmission or transportation facilities, Unlike traditional market power analysis in unregulated industries, where the courts typically focus upon things facility doctrine like “market share’, the essential holds that, where an entity controls a facility essential to effective competition, it has an obligation to give competitors reasonable access to that facility or it will face charges of monopolization. Generally, the doctrine does not create any form of peu se violation emanating from the mere possession of the facility and the denial of access; rather, it shifts the burden to the defendant to provide a satisfactory business justification for its denial of use of the facility. Hence, the denial of access will be deemed unfair or exclusionary unless an explanation is offered that is consistent with legitimate business conduct. This requires a ‘rule of reason’ analysis of the monopolist’s reasons for refusing to do business at all.7 While the exact status and scope of the essential facility doctrine has never been clarified by the Supreme Court, its initial relevance to the natural gas and electric transmission areas is obvious. Transmission facilities typically cannot feasibly be duplicated by potential competitors; indeed the transmission function is generally viewed as a ‘natural monopoly’ function. Yet transmission access is also viewed as generally necessary for new competitors to enter the retail and wholesale markets. All this has put the doctrine in the forefront of FERC’s own anti-trust analysis, as we shall see. The judicial application of the doctrine, especially to the electric power industry, has also been significant; indeed, this probably has been the most actively litigated anti-trust area in the electricity area. The seminal and most quoted decision is the Supreme

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Court’s Otter Tail decision in 1973.” That case concerned a utility’s refusal to wheel power to municipalities, whose retail loads were formerly served by Otter Tail, but who had established their own electric distribution systems. The court found sufficient market power in the retail sales market in the area and used the ‘essential facility’ analysis to find a refusal to wheel to be anti-competitive. However, the court did recognize that compulsory interconnection or wheeling could erode the utility’s integrated system and threaten its capacity to serve. Nevertheless, the court found that the utility had not asserted credible evidence in this regard, but had used its strategic dominance in transmission to foreclose potential competition for retail sales, Susbsequent decisions have recognized that where wheeling could impair adequate service to native load customers and where there are sound engineering or economic justifications for refusing access, there will be no anti-trust offence. The effect of the reasoning in Otter Tail has been significant both in FERC cases, as we will see, and in the context of the Nuclear Regulatory Commission (NRC) reviewing applications to construct and operate licensed nuclear facilities. The NRC is required to ensure that a proposed licence will not ‘create or maintain a situation inconsistent with the antitrust laws’.’ Under this charge, the NRC has in fact done a good deal more than the courts to advance transmission access, particularly for municipal and cooperative utilities. The NRC has required a number of nuclear licensees to offer competitors and wholesale customers open access to facilities as a condition of the licence. While the NRC’s authority is, of course, limited to nuclear licence applications, its imposition of transmission conditions has been held not to be subject to the same constraints as those imposed on the anti-trust court. For instance, the NRC’s alleged failure to consider the impact of regulation on the utility’s possession and use of monopoly power has been held not fatal to its ability to impose conditions. There may be an important lesson in such precedents as FERC appears to be moving aggressively to use its conditioning authorities to meet pro-competitive goals. Another very general form of monopolization is leveraging, ie the use of monopoly power in one market to gain competitive advantage in the second market. The essential facility doctrine is itself a specific form of leveraging -the monopoly power in the transmission market is used to gain competitive advantage in a wholesale or retail power supply market. Another specific form of leveraging is the so-called ‘price squeeze’ doctrine, wrhich is based on

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a quite similar theory - the use of the monopoly power inherent in the integrated supplying utility’s relationship with a dependent purchase utility to overprice wholesale power to the latter and so to undercut the latter’s ability to compete for retail customers. Price squeeze will be discussed below in the context of FERC’s activity in this area. Leveraging as a more general offence has usually been applied where the utility is accused of using its monopoly position in the provision of utility service to gain unfair advantage in another related business, as distinct from another level of utility business itself, This has typically occurred where utilities have diversified into related markets such as the provision of demand-side or conservation services; here, the monopoly power in the distribution of electricity is used to gain advantage over electrical contractors competing for unregulated conservation business. While this area was popular in the late years of the Carter adnlinistration with the Justice Department, where the notion of ‘transferred monopoly’ was a special focus, in fact there has been relatively little judicial development, partly, I think, because the courts have applied quite stringent tests to establish an abuse of monopoly power. The fact that the utility has competitive advantages is not enough. They must be used specifically to set prices or to exclude competition. There has not, to date, been an explicit Supreme Court finding on leveraging. Another monopolization offence that has potential application to the regulated energy industries is that of predatory pricing, ie prices designed not to minimize losses in the face of competition but to eliminate rivals and create a market structure without those rivals that will later enable the seller to recoup his costs, and a good deal more, through monopoly prices. Of course, the tension inherent in the anti-trust laws is that reducing prices to undersell competitors is exactly the type of pro-competitive conduct that these laws are designed to protect. Hence, the offence is strictly limited to situations where a firm has monopoly power as, of course, have most electric and natural gas utilities. The general standard that has been devised in the unregulated context for distinguishing predatory pricing from legitimate price competition has been pricing below an appropriate measure of cost, usually shortterm marginal cost. However, that test, and the whole notion of the viability of the predatory pricing doctrine in the anti-trust laws, has been under serious debate in the USA over the last few years, and I would say that the future of the doctrine is somewhat uncertain. An offence somewhat similar to leveraging, and of

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elecrric industry

some relevance to our industries, is that of ‘tying’ use of a certain level of market power in one product to force the sale of another product upon the buyer, ie ‘an overt, coercive link’ between two products rather than the more general presence of monopoly power in one market that underlies the leveraging offence, Tying has often been applied to functionally related products where the one product may be useless without the other. The offence would seem to become more relevant as regulators force unbundling of natural gas or electric supply and transportation services and as the providers of those services attempt to rebundle them through tying arrangements. Predictably, there has been some judicial focus upon tying in the natural gas area where the notion of unbundling is far more advanced than in the electricity area.

It has long been recognized that the regulated industries are not exempt from the anti-trust laws, notwithstanding pervasive economic regulation; and that regulatory oversight does not confer blanket immunity upon public utilities. The notion of some sort of implied immunity that might emanate from FERC’s regulation of wholesale transactions was also rejected in Otter Tail. There, interestingly, the Supreme Court found a Congressional intent to reject: a pervasive regulatory scheme for controlling the interstate distribution of power in favor of voluntary commercial relationships. When these relationships arc governed in the first instance by business judgement and not regulatory coercion, courts must be hesitant to conclude that Congress had intended to override the fundamental national policy embodied in the antitrust laws. “’

Since that case, utility reliance on implied immunity as a defence is essentially dead; and the focus of the effect of compliance with regulatory policies has shifted to negating substantive elements of the offence of m~3n~~polization, such as w~lfuIness or intent; or to providing sound business reasons for the alleged anti-competitive activity. However, there are two specific doctrines that do provide some general immunity that I should briefly mention: 1.

The so-called Noerr-Pennington doctrine, which holds that individuals or businesses are immune from anti-trust liability for petitioning activity protected by the First Amendment of the US Constitution, even if such activity would have anti-competitive consequences. Hence, actions taken to influence judicial, administrative,

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2.

executive or legislative decision making cannot form the basis for anti-trust liability. This defence even covers the institution of law suits in State and Federal courts. However, the doctrine does not apply where the efforts to petition government or to bring suit are merely a ‘sham’ to disguise what is really an effort to interfere with a competitor’s business - the so-called ‘sham’ exception. As we will see, this exception is critical to the evolving doctrine of non-price predation. The most widely litigated immunity or exemption from the Federal anti-trust laws is the so-called State action doctrine, which immunizes activities conducted pursuant to a ‘clearly articulated’ State policy that is subject to ‘active supervision’ by the State agency concerned. l1

The State action doctrine is really based on principles of Federalism, ie the protection of States’ rights under the US Constitution. However, the courts have progressively narrowed the scope of the exemption to situations where the conduct is carried out pursuant to a clear State policy that is actively supervised by the State, as distinct from broad State assertions of authority that are not really implemented and pursued as specific State policy. So there is a delicate line to be drawn. For instance, State policy need not actually compel the specific anti- competitive conduct and the ‘clear articulation’ required can be provided by a State commission administering a comprehensive regulatory scheme.12 The seemingly strange disjuncture between a clear exemption doctrine for State regulation and the apparent absence of any sort of implied immunity for compliance with FERC regulatory action becomes less troublesome as FERC regulation moves towards transactions and prices that are set by negotiated contracts rather than by regulatorily imposed rates. Indeed, the Supreme Court’s statement in Otter Tail on implied immunity seems to anticipate such a trend. However, the difference in treatment may still have troubling aspects. In Canada, in contrast, there is a generalized, though less well defined, ‘regulated conduct’ defence that covers both Federal and Provincial regulatory action. While the notion of implied immunity emanating from FERC regulation, which would prevent the court from reaching the merits of an anti-trust claim at all, is dead, government regulation is relevant to proof of the substantive elements of a cause of action under Section 2 of the Sherman Act, particularly with respective to anticompetitive intent. This is well put by Areeda and Turner:

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Antitrust courts can and do consider the particular circumstances of an industry and therefore adjust their usual rules to the existence, extent, and nature of regulation. Just as the administrative agency must consider the competitive premises of the antitrust laws, the antitrust court must consider the peculiarities of an industry as recognized in a regulatory statute.” For

instance,

a number

of courts

have

rejected

the

in the context of regulated public utilities, which are often granted market power over specific service territories by State governments, on the general theory that economic regulation is considered an adequate replacement for competition. Moreover, the second element of the offence of the monopolization, the willful acquisition or maintenance of a monopoly, may be mitigated by proof that the defendant utility’s actions were reasonable and represented a good faith attempt to comply with regulatory policies.‘4 Thus, consideration of the exact nature and extent of the regulation is critical to resolution of the substantive issues in the anti-trust cases, as well as to immunity issues such as State action. Such an assessment requires ‘close scrutiny of the regulatory scheme in question’.” Because the regulatory schemes for each of the regulated energy industries, and for other industries such as communications and transportation, are so different, and because the trend towards competition and deregulation has proceeded at a different pace in these industries, the application of anti-trust laws, and anti-trust principles within economic regulation, varies greatly from industry to industry. Hence, while there is a great deal to be learned from analysis of the ‘essential facility’ cases in the telecommunications and other areas, these analogies are as fraught with dangers as they are sources of reliable precedent. traditional

market

share

analysis

Protecting growing competition in regulated US energy markets The institutional

structure

As the natural gas and electricity industries in the USAl have become partly deregulated,” two trends have become evident. The first is a growing tendency of each industry, under pressure from competition, to restructure, both horizontally and vertically. The second is the development of competitive pressures on markets hitherto dominated by strong, State-sanctioned monopolies. Deregulation has affected all segments of these industries.ix Hence, regulators face immediate challenges on two fronts.

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Anti-trust and regulatory issues in a competitive electric industry

The first challenge is how to nurture developing competition in some sectors of the industry and to protect it from the monopoly power pervasive in other sectors. This is essentially an anti-trust problem in a new context. The second challenge, which arises in sectors still subject to significant regulation, such as natural gas pipelines and integrated electric utilities, is the problem that State-sanctioned monopolies are no longer strong, but rather weak or ” This poses a challenge to the tradiantagonistic. tional rate regulation model because regulators have relied, under this model, on the monopoly power of the regulated entities to achieve important regulatory objectives. Both challenges raise basic questions as to the continued viability of traditional approaches to regulation. These questions are at the heart of many industry-specific regulatory reform efforts, which are beyond the scope of this paper. Instead, I will identify the more overt anti-trust concerns confronting economic regulators, such as FERC and State public utility commissions (PUCs), and confronting the traditional anti-trust enforcement agencies, such as the Antitrust Division of the Department of Justice (Justice) and the Federal Trade Commission (FTC). An initial issue is essentially institutional. Where should the primary responsibility for assuring compliance with anti-trust standards lie -with regulatory agencies, traditional anti-trust enforcement agencies, or some combination of the two? Current practice appears to be evolving, haphazardly, towards the last of these, though it is not clear that this combination will be effective if subjected to pressure. The traditional anti-trust enforcement agencies, Justice and the FTC, while steeped in anti-trust expertise in unregulated markets, are less able to monitor on a day-to-day basis complex and distinctive market developments in regulated industries or the rapid and complex realignment of regulation where competition is being introduced. Moreover, as the dichotomy between tightly-regulated industries and free markets breaks down, many novel and complex anti-trust and regulatory issues arise. Nevertheless, Justice has sporadically intervened, usually with limited resources, in generic FERC proceedings in the oil pipeline and natural gas areas. As yet, however, Justice has not intervened significantly in the more time-consuming and demanding, but critical, case-by-case implementation of generic decisions, such as FERC’s mid-1980s natural gas initiatives, Orders 380, 436, and 500.20 For instance, the traditional anti-trust agencies did not intervene

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before FERC in an important merger proposal by two major Pacific northwest electric utilities, for which merger FERC subsequently conditioned approval on the merged company’s accepting stringent transmission access conditions designed to prevent potential abuses of monopoly power in wholesale markets.2’ FTC intervention has also been very limited in the major areas of energy regulation. However, it has been expanding its ‘competition advocacy’ programme to ‘persuade organs of Federal, State and local government of the virtues of competition and the costs of regulation’.** Much of this effort has been directed at opposing State legislation that would limit retail gasoline marketing by integrated oil More recently, the FTC has filed comcompanies.2” ments with FERC ‘admonish[ing] it to discount competitor opposition to [pipeline] certification applications’ on the grounds of potential non-price predation.24 Most of the FTC’s recent focus, however, has been upon its more traditional anti-trust role of reviewing natural gas pipeline merger proposals.*” One can draw the tentative conclusion from this pattern of anti-trust enforcement that Justice and the FTC recognize the special expertise necessary for effective anti-trust policy in regulated industries. They have tended to assume, and indeed Justice has advocated, that the economic regulators will themselves play a major role in developing and implementing such a policy, especially in areas where resource constraints limit the ability of the enforcement agencies to do so. Justice and the FTC prefer to intervene selectively in regulatory proceedings to help mould regulatory policy, rather than to undertake the formidable analysis necessary to develop their own anti-trust policies tailored to each of the industries concerned. Where their traditional enforcement functions have been triggered, as in merger reviews, their role has been largely reactive and their level of scrutiny has varied.26 On the other hand, the economic regulatory agencies, such as FERC, have little specialized anti-trust enforcement expertise as such. However, they are familiar with the structure and characteristics of the industries they regulate, the pricing models for the economic regulation they impose, and increasingly with anti-trust principles themselves. A full understanding of pricing models tends to be critical, for instance, in evaluating claims of price discrimination.27 Typically, agencies such as FERC do not view themselves as having an anti-trust enforcement role as such.28 However, the courts have generally ruled that FERC must take into

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account the policies underlying the anti-trust laws in performing its responsibilities.2” Moreover, FERC operates under statutory mandates of pertinence to competition, such as those proscribing ‘undue discrimination’ in utility rates and practices.” These mandates resemble anti-trust standards in some respects, and they suggest a preventive anti-trust role for FERC.” The courts have been pressing FERC for over a decade to evaluate utility rate filings for wholesale electric requirements customersX2 in terms of their potential to create a ‘price squeeze’ for these customers.“’ Since 1987, FERC has responded by addressing price squeezes more explicitly and has placed greater reliance on traditional anti-trust analysis.“” Moreover, the increased evidence of competition in electricity wholesale markets and FERC’s administrative efforts to realign the natural gas markets,” which have become partially deregulated under the Natural Gas Policy Act of 1978,“” have led to a new awareness of the relevance of anti-trust scrutiny in the course of economic regulation. They have also led to some recognition of the need to enhance FERC’s anti-trust expertise.“7 Thus, over the last two or three years of the 1980s FERC has used anti-trust standards to meet its broader ‘public interest’ charge in its regulation of rates and corporate structures of regulated entities.“s In addition, the FTC and Justice have shown a growing propensity for intervening in the regulatory arena to foster competition. Despite overlapping responsibilities and the potential for policy conflicts between Justice, the FTC, and FERC, the executive and legislative branches of the Federal government have not yet developed a cohesive strategy towards anti-trust compliance as competition develops in the regulated energy industries. This potential for overlap presents two dangers: regulatory ‘overkill’ or ‘layering’ when several agencies act on a matter,“” and potential vacuums when none act. Both of these dangers could hamper effective anti-trust monitoring and effective economic regulation.~‘~ Where Congress has intervened, apparently motivated to fill vacuums, it has often achieved regulatory layering.“’ However, the intensified regulatory focus on antitrust standards has not occurred in a political vacuum. The executive branch has several means of influencing competition policy at regulatory agencies such as FERC: statutory mandate, appointment of commissioners, and Justice or FTC intervention in regulatory proceedings. In practice, the alert exercise of the last function can raise issues FERC has overlooked or give signals as to desired policy direction. Moreover, the enforcement agencies, through

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the exercise of their discretion not to prosecute or investigate, can generally avoid ‘layering’. Hence, the dangers of vacuums and of regulatory layering should not be overstated. Moreover, for the executive branch to impose a formal mechanism to assure policy cohesion would require reconciling the quite different functions of all of these agencies and raise questions, for instance, as to the ‘independent’ status of FERC. From this brief institutional survey, several increasingly important, and as yet unanswered, questions emerge. First, can the growing tendency of FERC to use anti-trust standards in its broad evaluation of ‘the public interest’ in regulation, or in setting ‘just and reasonable’ rates, comfortably co-exist with the increasingly important and complex duty of Justice and the FTC to assure compliance with the anti-trust laws as competition grows in these industries? Congress has generally assumed it can.@ FERC’s mandate, broader than that of the anti-trust enforcement agencies, requires balancing various public interest criteria of which competition is but one, however important. By its nature, economic regulation implies the sanctioning of potentially anticompetitive practices in some circumstances. Indeed, one role of FERC is to weigh the respective merits of competition and monopoly power in any given area of the industries it regulates against the yardstick of some higher norm, such as economic efficiency or equity, or some combination of these.‘” In contrast, the mandate of Justice and the FTC is more specifically to foster competition, although a good part of modern anti-trust doctrine is driven by the same ultimate goal - economic efficiency. The potential for conflict in different applications of pro-competition policies and regulatory standards is obvious. However, this potential also should not be overstated. In general, the goals of the anti-trust laws and of economic regulation are complementary. Both seek or should seek the result that maximizes economic efficiency, although it is not clear how many economic regulators today fully appreciate the impact of the economic efficiency goal or are committed to its achievement. True conflicts are unlikely to arise except where Justice and the FTC disagree with the economic regulators as to the best means of achieving economic efficiency, or where a regulator seeks to further regulatory goals other than economic efficiency. How many such conflicts occur will depend very much on the philosophies of each agency towards regulation and competition. Clearer inter-institutional relationships, especially as to primary or exclusive jurisdiction, and clearer expressions of legislative intent

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Anti-trust and regulatory issues in a competitive electric industry

than we have seen to date, could help to resolve such conflicts. Second, to what degree can FERC, Justice, and the FTC afford to focus on regulation of conduct as opposed to the creation of structures providing competitive incentives? Third, what role should FERC play if the antitrust enforcement agencies abdicate their responsibilities, and vice versa? In other industries, such as telecommunications, judicial industry restructuring initiatives have not been viewed as entirely successful. Arguably, they should have been handled by a regulatory agency more alert to and familiar with the industry. Given the rapid evolution of competition in energy sectors that are still regulated, the next few years should bring more conscious efforts to confront these questions. We may see the evolution of antitrust doctrine more tailored to the economic regulation area than that developed by the courts for unregulated markets. I suspect that the direction of competition policy in the European electric power and natural gas industries will be greatly influenced, perhaps even more so than in the USA, by similar institutional relationships, in particular those between DG IV (the competition directorate-general) and DG XVII (the energy directorate-general) of the EC Commission. There is an apparent recognition in the EC that, to quote the EC Commission’s May 1988 paper Energy in Europe, ‘a strong competitioil policy will play an essential role in keeping and reinforcing the internal market’,“4 and that the EC’s competition rules under Articles 85 and 86 of the EEC Treaty will be a key instrument in implementing this policy. Of course, it is the competition institutions of the EC that are among its strongest and most centralized. This proposed EC policy would, then, suggest an important interplay between these competition institutions and those which might emerge to implement the EC’s transmission rules and other regulatory ingredients necessary for a viable, integrated, European market in bulk power. Differences in philosophy between DG IV and DG XVII. and how the EC’s competition laws influence the integration process, may be the key to what these industries will look like in 2000.

The application of anti-trust principles in FERC regulation In the electric power area, there have been three principal areas, two significantly overlapping, where FERC has identified serious anti-trust or competi-

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tion concerns and has applied anti-trust or quasianti-trust principles to deal with them in the course of various facets of its economic regulation. There is a potential fourth area, non-price predation, which has been advanced by the FTC but which, in my view, has an uncertain future in the regulatory context because of the nature of economic regulation. Finally, there is the emerging issue of affiliate relations in both the electric and natural gas industries. Price discrimination and price squeeze Because most of the analysis of price discrimination at FERC that has risen above the level of meaningless slogans has, until recently, occurred in the context of the ‘price squeeze’ doctrine in FERC electric ‘requirements’ rate cases, it is necessary briefly to discuss the evolution of that doctrine. Inadequate serious attention has been paid to the issue of price discrimination in US economic regulation; though that may not turn out to be the case in Europe.4” Until recently, FERC - and its predecessor, the Federal Power Commission (FPC) - had concentrated its price discrimination efforts in attempting to apply the anti-trust doctrine of ‘price squeeze”’ to FERC’s wholesale electric rate-making jurisdiction. Price squeeze is really a form of ‘leveraging’ in which a firm uses its monopoly power in one market (in electricity, the wholesale ‘require~~ents’ market) to gain advantage in another (in electricity, the retail sales market). In most of the cases, municipal wholesale ‘requirements’ customers (many with only distribution facilities) have alleged that their supplying (usually investor-owned) utilities have used their monopoly power in their integrated systems to overprice wholesale power and hence to undermine the ability of the municipals to compete with them for retail customers. FERC’s efforts were initiated in response to a 1976 Supreme Court decision, Federal Power Comrn~s~iu~ v Coway Carp, which rejected an FPC claim that it had no jurisdiction to address ‘price squeeze’ claims. The Court held that FERC was required to consider the potential anti-competitive effect of a price squeeze in determining whether wholesale rates were ‘just and reasonable’ and that FERC had the discretion to push wholesale rates to the lower end of a ‘zone -of reasonableness’ to remedy a price squeeze.“’ Taking advantage of this discretion, FERC first determines the ‘just and reasonable’ rate or zone4’ on ‘cost-based’ principles, and then examines allegations of price squeeze. After a decade-long struggle to develop a metho-

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dology for analysing price squeeze, which initially received tolerance and then growing impatience5” from the reviewing courts, FERC finally made a major price squeeze finding in 1987. In Southern California Edison Co, FERC required the supplying company to reduce its rates and to make refunds.“’ In dissent, Commissioner Stalon criticized FERC’s methodology for determining price discrimination, the first major element of a price squeeze finding.” He argued that FERC’s methodology is fundamentally flawed because it is likely to increase the obstacles to competition where competition can be constructive, and at the same time increase pressures for competition in areas where regulatory policy has traditionally encouraged, partly on economic efficiency grounds, tight limits on competition.5” The price squeeze doctrine applies to a special form of price discrimination that emanates from the dual regulatory status of fully-integrated utilities operating under both State retail and Federal wholesale rate-making jurisdiction. Moreover, its application has been limited to wholesale electric ‘requirements’ rates, where competition is not viewed as a major element in regulatory oversight.54 Indeed, it is the very lack of competitive supply options for ‘captive’ requirements customers”’ that typically justifies ‘cost-based’ rate regulation in the first place. Wholesale requirements service comprises an increasingly narrow part of the wholesale electric markets. The price squeeze doctrine has not been applied to the wholesale ‘coordination’ markets, which mostly comprise trades of power between ‘non-captive’ utilities.” It is the coordination markets that have grown substantially over the past and that have demonstrated intwo decadess7 creasingly competitive characteristics. attention to Ironically, then, most of FERC’s price discrimination has been devoted to a doctrine of price squeeze developed in an era of little wholesale competition in the electric industry. Moreover, in developing this doctrine, FERC attempted to apply anti-trust concepts in the context of a rate-making model that does not contemplate competition, in order to protect competition in markets where its presence and desirability were marginal at best. Not surprisingly, the effort has been strongly criticized on these grounds, most notably by Joskow and Commissioner Stalon.58 FERC’s effort to develop a workable analysis of the complex and far more important question of price discrimination in previously regulated wholesale markets experiencing some level of deregulation is embryonic at least. Its first serious effort to confront the issue in the natural gas area was strong-

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ly criticized by Commissioner Stalon, who attempted to set forth standards for evaluating price discrimination.59 As yet, FERC has not significantly broadened the focus of its price discrimination analysis.60 However, that development is probably inevitable in the long term as wholesale competition develops. In 1990, however, FERC dismissed the notion of dealing with the issues raised in Commissioner Stalon’s lengthy price squeeze dissent in a footnote!61 Merger analysis and the application facility’ doctrine

of the ‘essential

I shall deal with these two important areas of FERC activity together, mainly because the seminal FERC case to date in the merger area, Utah Power & Light,62 brought the two areas together in what is really a unified chain of analysis. FERC’s vigorous use of the ‘essential facility’ doctrine to advance its transmission access analysis in the context of the first intensely litigated FERC merger case for years surprised many in the industry. Utah Power concerned a proposed merger between two large western utilities, in seven western states. The merger would consolidate control over major, scarce transmission paths between the capacity-rich Pacific northwest and the lucrative California markets. In setting the case for hearing, FERC adopted a Section 7 Clayton Act analysis as the preferred analytical framework for the case and included reference to the Justice Department’s Merger Guidelines, but FERC also suggested the relevance of the essential facility doctrine. After an intense trial process, an administrative law judge concluded that the merger would give the new company enhanced abilities to monopolize the western bulk power markets through control of ‘bottleneck’ transmission facilities. Responding to this record, FERC embraced the essential facility doctrine as a central part of its analysis and imposed stringent transmission access provisions on the merged company, provisions designed to mitigate the anti-competitive potential of the merger, as a condition of its approval of the merger.63 A brief history, explaining why it was only in 1988, in a rather surprising setting, that FERC endorsed the ‘essential facility’ doctrine, is instructive. At first sight, the doctrine would seem to have long standing significance in the transportation or transmission functions of natural gas and electricity industries, which are widely viewed as strong ‘natural monopocharacteristics. However, lies’, with ‘bottleneck’ partly because of this natural monopoly status, while the wholesale supply markets were tightly regulated, monopoly control over the transmission and trans-

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Anti-trust and regulatory issues in a competitive electric industq

portation functions was viewed as necessary to the orderly development of these industries and was sanctioned by the regulatory agencies.64 Then, as competition developed, the need to open up access to bottleneck transportation/transmission facilities for competing suppliers became evident, if the competition that had begun to develop in these markets was to be fair and efficient. However, the regulatory agencies found that they had limited direct authority to mandate greater access by competing suppliers in the natural gas and especially the electric power industries. Nevertheless, FERC, spurred by incremental legislative deregulation of natural gas production, 6s has moved to encourage open access to gas pipelines through a complex package of administrative reforms. 6h These reforms condition certain liberalizations of pipeline regulation on ‘voluntary’ grants of access to other suppliers by the pipelines. Until Utah Power & Light, FERC had moved cautiously in the electric power area, despite some well developed theories that FERC could order access to remedy undue discrimination in rate making. 67 It isL notable that most of the judicial focus on the essential facility doctrine has been in the context of relations between supply-dependent distribution utilities and integrated companies. FERC’s extension of the doctrine into the increasingly competitive bulk power markets raises new issues. While this is a context in which the doctrine might seem to have more general relevance, the fact that purchasers in these markets may have more purchase options than the supply-dependent distribution utility may seem to weaken somewhat the rationale for finding that even ‘strategic’ transmission facilities are necessarily ‘essential facilities’. FERC has not accepted that argument so far and seems to apply notions analogous to the ‘essential facility’ doctrine quite broadly in this context and in the context of its evolving transmission policy more generally. In fact, the relevance of the doctrine is at the centre of a vigorous generic policy debate, focused on FERC’s Transmission Task Force Report, as to how much monopoly power there is in transmission assets. It is a very central issue in the two current, intensely litigated, merger cases before FERC, concerning the proposed mergers of Southern California Edison/San Diego Gas and Electric and the Northeast Utilities/Public Service of New Hampshire. It is also central to FERC’s reasoning process in a series of cases in which FERC is conditioning grants of utility requests for liberalized pricing on utility commitments to grant more open transmission access to their competitors. Such cases

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are likely to become a major vehicle in the early 1990s for advancing FERC transmission policy and its policies for nurturing wholesale market competition. Because transmission access is so central to the debate over competition in these industries, and especially to the creation of the sort of competitive markets that would justify relaxing economic regulation in the wholesale area, transmission access is likely to remain the focus of many regulatory reform debates in the near future. The degree to which access will be introduced through the more traditional anti-trust ‘essential facility’ doctrine, as in Utah Power 6; Light, as opposed to more generic regulatory reform initiatives, is less clear. Non-price

predation

I will only note a novel anti-trust theory that seems to have special relevance to the regulated energy area - non-price predation, broadly defined as any strategic behaviour designed to increase a rival’s costs. The most obvious example would be a pipeline company intervening in a rival pipeline’s application before FERC to certificate proposed new facilities - intervening in order to delay or kill the project, and so to gain a competitive advantage, rather than intervening to raise a legitimate regulatory concern. This distinction seems to present a fine line, difficult to draw in practice. However, so significant was this possibility viewed as competition develops in the natural gas industry, that the FTC raised the issue in an intervention before FERC. Suffice it to say that FERC did not take the bait; and, in my view, the concept will be hard to swallow for regulatory agencies as deeply imbued with notions of ‘due process’ as is FERC. However, the doctrine is more fully discussed elsewhere.hx Marketing

affiliates

Another emerging concern at FERC, in both the electric power and natural gas areas, is the issue of transactions between regulated entities and their (often unregulated) marketing entities. At the moment, there appears to be a jumble of concerns, some of them seemingly anti-trust-related, some of them related to other regulatory concerns such as ‘self dealing’ at the expense of consumers and, perhaps, a general concern that affiliates will be used to by-pass regulation. The issue has received considerable attention in the natural gas area. In the electric power area, in perhaps the first major FERC decision in the area, the Portland General Exchange case, FERC stunned the industry by taking a tough stance on the ‘self dealing’ issue. FERC asserted

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what I think is a new preventive role in protecting retail and wholesale requirements ratepayers from ‘self-dealing’ abuses when approving power sales arrangements upfront, rather than leaving the ‘self dealing’ issue to review at the cost pass-through stage. There will soon be more FERC decisions in this area; and how far the affiliate issue develops as an anti-trust issue, or as a fui genesis regulatory issue, remains to be seen.

Integrating energy markets and anti-trust regimes under the Canada/US FTA Lessons for European energy integration may emerge from the experience of integrating the domestic energy markets of Canada and the USA under the Free Trade Agreement (FTA) and from the role anti-trust policy plays in that process. Because this topic probably deserves a paper in its own right, perhaps a book, it is not possible to do it justice here; but there are three general observations that are already evident and which might have some application outside of the Canada/US context. First, while the FTA says a great deal about trade liberalization and takes significant steps to ensure compatibility of the two countries’ domestic energy regimes (which are left largely intact), it says very little about harmonization of anti-trust laws. This is in part due to political sensitivity in Canada to the notion of conforming domestic Canadian laws to domestic US laws. It is also due to the fact that each country’s anti-trust laws have operated on parallel paths with similar objectives for nearly a century and have achieved comparable levels of progress, reducing the likelihood of serious conflict and, hence, minimizing the need for harmonization. Moreover, the entry into force of the FTA has not significantly enhanced pressure for anti-trust harmonization. Indeed, the FTA, whose objectives include ‘facilitat[ion] [of] conditions of fair competition within the free-trade area”’ may be viewed as complenlentary to the domestic anti-trust laws, whose objective is fair competition in domestic markets. Furthermore, the ‘national treatment’ provision of the FTA, which, for the energy markets, amounts to a requirement not to discriminate against the other country’s energy products, is not dissimilar to proscriptions against ‘undue discrimination’ contained in the domestic laws which establish economic regulation of the electric power and natural gas industries.‘O Similar standards are also contained in some specific provisions in the energy chapter of the FTA.‘l Moreover, the domestic anti-trust laws generally do not themselves discriminate on the basis of national-

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ity, although Canada’s Competition Act does recognize international competition as a relevant factor in its review of mergers.‘* It is perhaps not surprising, then, that, historically, there has been relatively little conflict between the Canadian and US governments on anti-trust matters. Second, that happy comity is, however, far from the case when it comes to US application of its anti-dumping (AD) and, especially its countervailing duty (CVD) laws to Canadian goods, the latter driven, of course, by US concerns over subsidization of Canadian products. While these laws are not anti-trust laws as such, they do relate to economic governance and fair trade; and reams have been written in US anti-trust literature on their relationship to the anti-trust laws7” Suffice it to say that, because of the minimal progress that had been made in GATT on the subsidies/countervailing duties area, and because of the threat the subject’s emotional importance and complexity presented to the speedy resolution of the FTA negotiations, the issue was essentially shelved. It was passed over to a bilateral ‘Working Group’ established under the FTA, which has seven years to propose a solution. This could include consideration of steps as drastic as abolishing the AD/CVD laws and relying on (possibly expanded) domestic anti-trust laws to do the job. How the Working Group proceeds could be important to the future of FTA, especially as the subsidies issue is a potential problem in the energy area, which was one of the major driving forces behind the FTA. Third, the most immediate possible source of tension in the energy area under the FTA, is likely to come not from direct application of trade rules, but rather from actions of domestic regulatory agencies, such as FERC and State PUCs in the IJSA and the National Energy Board (NEB) and Provincial regulators in Canada. FERC provided a vivid living example of this potential during the FTA negotiations in its so-called ‘as billed’ decisions in 1986 and 1987 when it applied pricing principles to US pipeline rates for Canadian gas imports that were inconsistent with NEB pricing principles and that drew strong criticism from high government sources in Canada as protectionist and as unduly extending FERC regulation into Canada.74 One of FERC’s main underlying concerns was that the NEB’s pricing principles, if applied downstream to US pipelines, might give the purveyors of Canadian gas an unfair advantage to price discriminate in US markets. Hence, while the ‘as billed’ dispute was not strictly about anti-trust principles but about regulatory pric-

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Anti-trust und regulatory issues in a competitive electric industry

ing, underneath it (and, probably, underneath many such disputes that might arise) lay basic concerns about how ‘level the playing field was’ in the bilateral market; really a broad concern over fair competition, Such disputes are most probable in the energy area and are likely to elevate quickly to high government levels. Some actions since that time by FERC and the NEB, and by State PUCs regulating electric utility procurement, have come quite close to turning into similar disputes. In recognition of this potential, the FTA has established a special dispute resolution mechanism for energy, involving each country’s Federal energy department or ministry, in an effort to defuse such situations before they grow into full-blow disputes under the FTA.75

fur EC ~~t~~~~~u~ from the Canada-US FTA Lessons

Are there any currently apparent lessons in this experience to date under the FTA for the integration of the European energy markets in 1992? Candidly, there are not too many obvious parallels. While differences in anti-trust regimes are likely to be much greater within the EC, the fundamental distinction between the US/Canadian relationship and the EC is the existence in the latter of a powerful transnational competition enforcement structure, ineluding DG IV, that is likely to prove a powerful force in ‘ha~oni~ing~ the competitive environment. Hence, the process of harmoniz~~ti~~~and integration is likely to be very different. However, the issue of whether integration or harmonization of each country’s electric power and natural gas markets will occur mostly through actions under the competition laws, eg within Member States or at DG IV, or whether this will be achieved through bilateral or multilateral accommodations, perhaps under the aegis of DG XVII, seems to me to be a very open question. In either case, it is conceivable that such disputes as do arise may be more of the ‘as-billed’ variety, ie disputes over differences in energy policy or regutation but with competitive undertones rather than pure anti-trust disputes. If this topic seems complex and challenging, it should be noted that this paper has in fact simplified it considerably, at least as to institutional relationships, by concentrating on the relationship between economic regulation and anti-trust enforcement at the Federal level only, One could compound that complexity by bringing in the role of State public utility regulation, and State anti-trust laws ant-1 their enforcement. One could compound it further by bringing in the effect of the FTA which

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provides a framework for integrating under free trade principles the binational and variously regulated energy markets, and by bringing in the complex relationship under the FTA between the various Federal and State/Provincial agencies involved. That complexity, and certainly the challenge of the task, seems even more formidable in the case of the EC with its 12 Member States and, one suspects, more to come. The Europeans appear to be embarking upon a fascinating journey into some largely uncharted waters of economic governance. This paper is based on a presentation made at ‘Organizing regulating electric systems in the 1990s: A Euro-American ference’, organized by CEPRIM. Paris, France, 1090.

and con-

the most notable omission from my list is the RohinsonAct, a series of more detaifed statutory provisions directed at price discriminations However, while the issue of price discrimination is likely to emerge as a major issue in the US electricity and natural gas industries. the Robinson-Patman Act is sufficiently out of favour generally, and its principles viewed as so inappropriate for the regulated energy industry context. that its concepts have had little noticeable impact in that context, which is developing its nwn distinctive price discrimination standards. ‘United States v Grinnel Corporation, 384 US 563, 57671 (1966) ‘otter Tail Ptrwr Co. 1:United States, 410 US 366, 377 (1973); See also Aspen Skiing Co. v Aspen Highlands Skiing Carp, IO5 S.Ct. ‘Perhaps Patman

2847 (198.5). “MCI Communications Carp v AT&T, 708 F.2d 1081, 1108 n.35 (7th Circuit 1982), crri. denied, 104 S.Ct. 234 (1983). ‘Californiu Computrr Products Inc. v hternarictnal Business :Wachine.yCorp., 613 F.2d 727 (9th Circuit, 1979). *SeeAspen Skiing ~~rnpan~~~op cit. Ref 3. ‘General Motors Corporation (Crash Pam), 3 Trade Reg. Rep, q

219il at 22

331-32

(FTC,

1982).

~~~,~~~ ~~~~~.~~~~~~.~.~.).fi 2115(t)S. TfG(. op tit, Ref 3, at 374. “Southerrt Motor Carriers v United States, 105 S. Ct. 1721, 1728-32 (IYXS): California Retail Liquor Dealers Ass’n v Midcal Aluminium, Inc., 445 U.S. 97 (1980); Lease Lights, Inc. v Public Service Co. of Oklahoma, 849 F.2d 1330 (10th Circuit 1988). “See Southrrn Motors Carriers, ibid. “Areeda & Turner, Antitrust Law 1 9223d (1978). ‘%ee, eg Phonetele, Inc. v AT&T, 664 F.2d 716 (9th Circuit, 19X1), cert denied, 103 S. Ct, 785 (1983); Mid-Texas Communica“‘Offer

Tom .System.r, Jrtc. v AT&T.

615 F.2d 1372 at 138&YO (5th Circuit

1380),C@H df?Pzi&& 449U.S. 912 ~i~~~). %x

MCI, op tit, Ref 3, at 1 IOX.

“Parts of this section are based on Reinier H. Lock, A.J. Schultz and Howard 1. Wetston, ‘United States-Canada evolving antitrust standards in domestic energy

energy trade and regulation’, University o,f Pennsylvania Journal ~flnter~ational3usirae.ss Luw, Vot 11, No 2, Spring/Summer, 1989, p 381. “Recognizing that major functions of these industries especially electricity and natural gas. will probably continue to be dominated by state-sanctioned monopolies for the foreseeable future, many US regulators prefer to refer to efforts to introduce more competition inro these industries as ‘regulatory reform’ rather than deregulation. ‘Deregulation’ is used here as a convenient shorthand to cover all developments in this direction. “Some level of economic regulation of the transportation or transmissions function is the feature common to the oil, natural gas, and electricity industries. “Set C. St&n, ‘Economic regulation and discrimination when regulation and competition are mixed’. in 181stitutr fur Study of

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and regulatory

issues in a competitive

electric industry

Regulation, Proceedings, 13th Annual Rate Symposium, St Louis, MO, USA, 1987, p 245. “Order No 380, Elimination of Variable Costs from Certain Natural Gas Pipelines Minimum Commodity Bill Provisions, 18 C.F.R. § 154.11 (1985) (originally appearing at 49 Fed. Reg. 22,778); Order No 436, Regulation of National Gas Pipelines After Partial Wellhead Decontrol, 50 Fed. Reg. 42, 408 (1985) (codified as amended in scattered sections of 18 C.F.R.); Order No. 500, Regulation of Natural Gas Pipelines After Partial Wellhead Deiontrol, 18 C.F.R. 00 2.104-05. 284.8-10 (1988) (orieinallv aooearing at S2 Fed. Reg. 30,334). However, Justice did ?ile comments in-the order 436 rule making process itself, and in a related rule making proceeding concerning the relationship between natural gas pipelines and their marketing affiliates: ‘Inquiry into Alleged’ Anti-Competitive Practices Related to Marketing Affiliates of Interstate Pipelines’. 3. F.E.R.C. Stats. & Regs. (1988). “Utah Power & Light Co., 45 F.E.R.C. fi 61,095 (1988). “See T. Calvani. Remarks at the Third Annual ABA Conference on Canada/US Trade in Energy, 18-20 May 1988, American Association, 1989, pp 153-158. “Ibid. ‘“Proceedings Texas Gas Transmission Corp., 46 F.E.R.C. 1 61,010 (1989); See Motion of F.T.C. Staff for leave to Intervene. ‘5Calvani. op tit, Ref 22, pp 154-158. “The level of scrutiny appears to be influenced by both the general approach to anti-trust enforcement of the Administration in power and by the perceptions of the enforcement agencies as to how effective oversight is at the regulatory level. For instance, in cases involving mergers of electric utilities, where FERC has actively been exercising its broad review authority under Section 203 ofthe Federal Pow& Act, 16 U.S.C. §824b (1982), action by the enforcement agencies has been limited to a low involvement Justice intervention in one case. In contrast, in natural gas merger cases, where FERC authority is limited, the FTC has assumed a significant antitrust enforcement role. “See, eg, Texas Gas Transmission Corp.. 35 F.E.R.C. 1 61,231 (1986) (Stalon, Comm’r, dissenting) (explaining why an individual transportation certificate granted pursuant to the Natural Gas Act I 7(c) was unduly discr
tion of the utility’s alleged purpose to forestall its customers from competing with it on the retail level); Boroughs of Ellwood City v FERC, 731 F.2d 959 (DC Circuit 1984); holding that the decision not to ameliorate a proven price squeeze ordinarily must be based on FERC’s determination that the anti-competitive effect of the ‘price squeeze’ on the wholesale customer and retail competitor is outweighed by the effect of a remedy on the supplying utility’s financial viability and its ability to serve all its customers). See also Mid-Tex Elec. Coop. v FERC, 773, F.2d 327 (DC Circuit 1985), holding that FERC’s reasons for adopting a rule allowing electric utilities to include in their rate bases amounts equal to 50% of their investment in construction work in progress were valid, but also holding that FERC’s consideration of potential ‘price squeeze’ and ‘double whammy’ effects of the rule was inconsistent and inadequate, thus, FERC had to reconsider the rule; Petition for review granred, 864 F.2d 156 (DC Circuit 1988), holding in part that FERC’s decision to address regulatory ‘price squeeze’ created by disparity in treatment of costs of construction work in progress by state regulatory agencies and FERC was reasonable, but that it was unreasonable to place the burden of proof on a wholesale customer seeking preliminary relief from anti-competitive ‘price squeeze’). “Southem California Edison Co., 40 F.E.R.C. 1 61,371 (1987). But see 46 F.E.R.C. 161,300 (1989) (Stalon, Comm’r, dissenting in part). Moreover, the DOJ has contended that FERC’s efforts to remedy a price squeeze should be more narrowly focused on those price squeeze situations revealing predatory intent and not on all situations where differences in FERC and state regulatory treatment lead to a price squeeze. DOJ’s Reply Comments. Electric Utilities, Construction Work in Progress and Anticompetitive Implications, III F.E.R.C. Stats. & Regs. 1 30,689, 30,692 (1986) (F.E.R.C. No. RM866). “FERC Order Nos. 380, 436, 500. 3hNatural Gas Policy Act, 15 U.S.C. 093301-432 (1982). “FERC, for instance, created a new position of Visiting Fellow and Special Advisor for Antitrust Analysis. Another indication of this recognition is an increased emphasis on hiring economists with anti-trust expertise in FERC’s newly-named Office of Economic Policy. “Utah Power & Lighr Co., 45 F.E.R.C. 161,095 (1988); Tucson Elec. Power Co., 44 F.E.R.C. B 61.441 (1988): Southwestern Pub. Serv. Co., 46. F.E.R.C. 161,606 (1988). ’ “Both the FTC and FERC appear sensitive to this danger. See Calvani, op tit, Ref 22, 27677; Utah Power R Light Co., op tit, Ref 38. 4”There is, however, some evidence that the anti-trust and regulatory agencies tend to avoid obvious omissions in governmental oversight through some mutual awareness of the roles each will play in an individual case. For instance, Justice has assumed only a limited intervention role in electric merger cases where FERC has broad authority, and, where the reverse is true in the natural gas company merger area, the FTC has assumed a significant enforcement role. “‘Prime examples are section 213(b) of the National Energy Policy Conservation Act of 1978, 42 U.S.C. 5 8214 (1982), and section 13 of the Electric Consumers Protection Act of 1986, 16 U.S.C. § 803(h) (1982 & Supp. V 1987). Both seemingly add little of value to existing anti-trust compliance mechanisms. 4’The courts have typically declined to find an implied repeal of the anti-trust laws in the regulatory statutes. A few of the statutes explicitly address the relationship of the regulatory regime to the anti-trust laws. Eg, Natural Gas Policy Act of 1978 § 304(e), 15 USC § 3364(e) (1982). ‘See Southern California Edison Co., 46 F.E.R.C. 1 61,300 (1989) (Stalon, Commissioner, dissenting). ‘“Energy in Europe: The Internal Energy Market, Commission of the European Communities, Directorate-General for Energy, COM(88) 238 final, 2 May 1988, Brussels. J5For instance, within weeks of ‘vesting’ in the UK electricity privatization, a conference in Windsor, at which Commission Stalon spoke, focused exclusively on the topic of price discrimination.

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Anti-trust and regulatory issues in a competitive electric industry ““United States v Aluminium Co. of America (Alcoa), 148 F. 2d 416, 336-38 (2d Circuit 1945) (applying a ‘transfer price’ test to identify price squeeze as existing when a vertically integrated entity could not purchase at its own wholesale rates and still realize a profit at its own retail rates, that price would injure wholesale customers who are its retail competitors). See I&zinois Cities qf Bethanyv FERC, 670 F.2d 187, 189 (D.C. Circuit 1981) (adopting the test advanced in Alcoa). “‘326 U.S. 271 (1976). ““Ibid. See also Li~inois Cities of Bethun~, 670 F.2d at 191 (enlphasizing FERC’s broad discretion in the ‘inexact science’ of ratemaking). ‘“A ‘zone of reasonableness’ is based on the company’s rate of return on equity, the element of the ‘cost of service’ as to which the most regulatory discretion is exercised. ‘“Eg Borough of Ellwood City v FERC, 731 F.2d 959, 979 (DC Circuit 1984), vacating a FERC decision not to remedy a price squeeze, and describing FERC’s decision as ‘illogical’ and ‘irreconcilih[lc]’ with the ‘very purpose’ of the doctrine. “40 F.E.R.C. 11 61,147 (1987). “46 F.E.R.C. 1 61,853 (1989).

“Ibid. ‘“The ‘competition’ for retail customers allegedly occurs in the one area of electricity regulation that has typically been dominated by state-sanctioned, franchised monopolies and where general competition is viewed as least likely to occur, and potentially inefficient should it occur. See ibid (Stalon, Comm’r, dissenting); Joskow, ‘Mixing regulatory and antitrust policies in the electric power industry: the price squeeze and retail market competition’, in F. Fisher, ed, Antitrust and Regulation, MIT Press, Cambridge, MA, USA, 1985, p 173. 55These utilities tend to refer to themselves as ‘Transmission Dependent Utilities’ (TDUs). See Utah Power & Light, 45 F.E.R.C. at 61,291 n.165, 61,310. ‘%nceptually, this would also include sales to utilities by non-utility generators. “About 38% of all Kwh sold to end users under regulation have previously been traded at least once in the wholesale market.

Energy Inf~rr~uti~~ Admi~~~strat~on, US department of Energy,

UTILITIES POLICY April1991

Financial Statistics of Selected Utilities, Public Dot No DOEIEIA0437(86). “See op tit, Ref 54. “Texas Gas 7’ransmission Corp., 35 F.E.R.C. 1 61,231 (1986) (Stalon, Comm’r, dissenting). 6”For instance, FERC has not yet acted on the April 1987 petition of the Cogeneration Coalition of America, Inc asking FERC to declare illegal under section 210 of the Public Utility kegulatory Policies Act of 1978. 16 U.S.C. # 824a-3 (19821. the growing practice of electric utilities offering industrial &tom&s rate discounts in exchange for those customers agreeing to defer or cancel decisions to self-generate through cogeneration. Cogeneration Coalition of America, Inc, No EL87-3rl-000, 28 April 1987. 6’Southern California Edison Co., 50 F.E.R.C. 161,275 at 61,869, note I (1990). 6’Utah Power Ri Light, 45 F.E.R.C. at 61,284, 61,286. “‘Ibid, at p 61, 287. “‘C. Stalon, ‘Opportunities and risks in regulating the rejuvenated natural gas industry’, unpublished manuscript; and, C. Stalon and R.W.J.H. Lock, ‘State-Federal relations in the economic regulation of energy’, Yale Journal on Regulation, No 2, Summer 1990, pp 479-482. 6-5Natural Gas Policy Act of 1978, 15 U.S.C. 99 3301-432 (1982). %FERC Order NOS 380, 436, 500. This auuroach was essentiallv i endorsed by the reviewing court in Associated Gas L~~stribators v FERC. 824 F.Zd 981 (DC Circuit 19871. 67See eg Reiter, ‘Competition and acckss to the bottleneck: the scope of contract carriage under the Federal power and Natural Gas Acts’, Land and Water Law Review, Vol 18, NO 1, 1983. “8Lock, Schultz and Wetston, Op tit, Ref 16. 69FTA, Article 102(b). ‘“See Shelly P. Battram and Reinier H. Lock, ‘The Canada/ United States Free-Trade Agreement and trade in energy’, Energy Law .IournaL. Vol 19, No 2, 1988, p 352. 71Eg Article 904, ibid, 382-383. ?Zompetition Act P$ 1.1, 96. 73See Lock Schultz and Wetston, op tit, Ref 16, pp 412-413. “%ee Bat&m and Lock, op tit, Ref 70, pp 338-339. 751bid, pp 379-382. 1

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