The franchise bottleneck

The Franchise Bottleneck Franchise terms can shape the structure and direction for much of the electricity industry's future. The electricity distribution franchise can become a wide-mouth jar quenching the large retail customers" thirst for low-cost, reliable energy or a bottleneck for captive customers. ]ames E Fairman

An attempt to derive an exclusive right from an ordinance granting the right to trim trees and use the town streets is fatuous and futile. --Piedmont Power & Light Co. v. Town of Graham, 258 U.S. 193, 194 (1920)

Jim Fairman is an attorney based in Bethesda, Md. Mr. Fairman has been engaged in the practice of law, with an emphasis on electricity and competition issues for many years. Before practicing law he was employed as a senior engineer with Westinghouse Corp. He holds a B.S.E.E. from the University of Illinois and a J.D. from Vanderbilt Law School.

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he franchise is the foundation on which the electric utility industry has been built. The potential for franchise agreements to affirmatively influence the anticipated transition to enhanced competition in the electric utility industry has been long overlooked) Vigorous national debate now focuses on such matters as stranded investment, the basis for pricing unbundled electric supply services, the cost-benefit of DSM

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measures and where state and federal regulators are to draw a line in the jurisdictional sands. One observer commented in 1985: The electric utility industry is dominated by engineers, accountants, lawyers and regulators who speak a jargon that baffles outsiders and obscures simple concepts behind a fog of specialized verbiage.2 Nearly a decade later, this assessment was restated: The industry's activity in the final quarter of the 20th century has given rise to a re-emergence of the "proliferation of obscure corporate forms" and "gaming" of the regulatory system) At the heart of the problem in 1900, in 1935, in 1978, in 1992 and today is service to retail

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customers. The franchise has been linked to the "regulatory compact" and characterized as a feasible right to protection. 4 Protection for whom? From what? Some one hundred years ago citizen-customers proclaimed their dislike of gross congestion stemming from the turn-of-the-century entrepreneurs' duplicative-facility approach to serving the public competitivel3a 5 But as the 20th century draws to a close, competition neither depends on nor requires duplication of distribution facilities. Yesterday's franchise is today's bottleneck. As originally designed, the franchise simply accommodated the citizens' need for protection from the proliferation of poles and the suppliers' desire for protection from the competition represented by the presence of a competitor's poles. Today; interpretations of the venerable franchise provisions stand in the way of the technological developments and pro-competitive policies. Non-owner use of the wires to deliver electricity from multiple power sources is coming in response to the pressures to furnish electricity more efficiently. The communities receiving electric service should exercise the full extent of their authority to obtain economies now available by using their charters and franchise contracts to bring competition in supply to all consumers relying on the distribution systems.

I. The Franchise in Context Today; many interests count on the old, codified aversions to congestion and aesthetic or environMay 1995

mental degradation to protect the industry from new societal pressures for greater efficiency and meaningful competition to reduce prices. Today's technology could better serve the goals of efficiency and competition, but it faces persistent opposition from the parochial efforts of assorted advocates who earn their living debating each other in the confusion over the conect definition of the "public interest" and "just and reasonable. "a

Yesterday's franchise is today's bottleneck. Communities should use their charters and franchise contracts to bring in competition.

A. State Sovereignty State constitutions, general laws enacted by state legislatures to reserve or delegate sovereign authority, and municipal charters serve as a backdrop for ordinances passed by the governing bodies of states' political subdivisions. Typicall~ a city has the right to grant selected enterprises special rights and privileges to erect facilities and to serve its community with electrici~, and the state regulatory commission is empowered to approve the franchise contract or to impose reason-

able conditions. 7 A non-exclusive franchise granted by a city does not grant a monopoly nor render competition illegal. Whether competition is to be prohibited or regulated is a matter of state policy and subject to alteration at the will of the legislature. 8

B. Federal Policies Federal antitrust laws applicable to business practices by or among entities offering service or products to the public must be added to the collage of state supervision. National policy opposes business conduct that tends to, or does in fact, restrain competition. While the federal focus examines burdens imposed on interstate commerce, consistent counterparts are to be found in state law. However, this dual supervision has yielded competing concepts affecting the industry's activity. The "state action" doctrine, for example, can afford some protection from the reach of federal antitrust laws. 9 The terms "natural monopoly" and "bottleneck" came into use to defend or challenge, respectively; the circumstances of business forms and commercial activity devised by owners and managers of the entities providing electric service to the public. These doctrines are relevant to understanding the role a franchise can play in moving toward a more-competitive service for consumers.

II. Natural Monopoly When electric utility service areas were small, isolated and supplied from nearby power sources, 29

I the concept of natural monopoly may have served as a practical solution to facility duplication. As service areas grew, so did interconnections and innovative corporate forms. Natural monopoly served to justify utility operations, irrespective of the areas served and the power resource locations. This was not a technological inevitabili~, but more likely the result of a presumption that social goals would be best advanced by promoting monopoly to avoid duplication of facilities. The so-called "obligation to serve" may in fact have arisen as a politically correct euphemism for exclusionary intent. 10 atural monopoly attributes include: (1) economies of scale in production; (2) relatively high fixed costs; (3) a single producer able to serve a market at lower costs than can two or more firms; (4) the impossibility of many competing plants; (5) higher customer prices when more than one supplier serves the market; (6) a high degree of price elasticity; (7) the necessity for the product; (8) inconvenience to customers caused by duplication of facilities; (9) limits on raw material; and (10) the presence of secrec)& Five of these features arguably best characterize a franchised electric utility. Economies of scale in production and transmission drove the industry for five decades, from the '30s to the '80s. Little talk was devoted to the economy of scale affecting the distribution function. High fixed costs can be the result of even prudent investment in facilities. Customer incon-

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venience, especially an aversion to duplication of facilities, has been with us for nearly a century. The needfor the product is not extensively challenged. Whether presence of more than one supplier drives up the cost of electricity continues to be debated. 12 When a natural monopoly is claimed to exist, then regulation is said to be the answer. However, [W]here there is a natural monopoly there is little room for antitrust policy except in so far as (1)

A well-designed franchise agreement has the potential to offer all retail customers within the community competitive alternatives.

the maintenance of the monopoly ceases to be inevitable or (2) power in the monopoly radiates into areas where competition is both possible and desirable. 13 The question that needs prompt attention is this: Is it inevitable that the supplier currently franchised to distribute electricity must distribute to retail customers power only from its own resources; generation which it owns or takes title to by purchase? The disputants have focused on state vs. federal jurisdiction to form the line of battle, and the rate-

I payer/consumer at the end of the line has been lost in the fog of debate. If private interests can market or broker power without ownership of the facilities that generate or deliver the same, it stands to reason that municipalities are able to exercise their contractual authority to achieve the benefits of the newly competitive milieu in which the power business finds itself. A respected economist and former regulator recently commented: Finally,... because there are parts of the industry that remain naturally monopolistic, we are going to need as far into the future as we can see, to protect customers who don't have competfive alternatives and to ensure competitors equal, nondiscriminatory access to those bottleneck facilities.14 A well-designed franchise agreement has the potential to offer all retail customers within the community competitive alternatives and to assist power supply competitors to gain access to the local distribution bottleneck. The strides being made with regard to competitor access to the transmission bottleneck are creating complementary mechanisms to transform what has traditionally been a balkanized industry. It is time to challenge the presumption that facility ownership mandates a distribution monopoly to sell electrici~.

III. The Bottleneck Proposition Under the Sherman Act, "bottleneck" facilities have been viewed as those that cannot be practicably

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duplicated by would-be competitors. The bottleneck must be an important facility in the control of its owners or operators, or an individual entity, which imposes a real handicap on would-be competitors without access to the facility or service. TM Allegedly anticompetitive behavior is defensible if it can be shown on the merits to be a reasonable and normal response to business conditions and has neither the purpose nor the effect of driving a competitor out of business. In "bottleneck" cases the tendency is to focus on the effect on competition.

IV. Franchise Rights, Bottleneck Restrictions Compare the character of a bottleneck facility with the attributes of service provided under color of a franchise to distribute electricity. The MCI v. AT&T decision outlined the features of a bottleneck. TMThey are: (1) control of the essential facility by the monopolist; (2) competitors unable to practicably reproduce the facility; (3) denial of competitor access; (4) feasibility of providing access. Little argument can be offered to rebut daims that: (1) distribution facilities are essential; and (2) competitors are unable to feasibly or economically reproduce them. Opposition to competitor access to retail electric markets has been rationalized on the basis of unnecessary n e w cost and facility duplication. The obvious and straightforward response is for a community to insist that existing

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facilities be available to multiple suppliers to serve the public. 17 Under the Sherman Act, a claim that access has been denied unlawfully can be met with a showing that: (1) to grant access is impracticable; and (2) the financial detriment to the facility owner of granting access would be so severe as to compromise its ability to serve its customers. These two aspects are getting and have had extensive comment nationwide in the context of transmission access.

scribe what options the affected consumers may elect with respect to the source of the power delivered for their use. Condemnation of the facilities as the sole means to gain the benefits of competition among suppliers is no longer a logical, credible or necessary rationale. It, too, may well be a vestige of the past. Municipal corporations may contract, sue and be sued. As political bodies they enj o y - a s they should--the authority to act on their citizens' behalf.

V. A Look at State Policy

Opposition to competitor access has been rationalized on the basis of unnecessary duplication. The obvious response is open access.

But their applicability to the retail franchise has been ignored. The time is at hand to apply the FERC concept of "comparability "18 to the use of distribution lines. To deny a competitor's access to a franchised utility's distribution facilities is harder than ever to distinguish from access to transmission) 9 State authorizations to route and erect transmission facilities do not preclude third-party use of the wires. The franchise has the potential to condition the manner in which local distribution facilities are to be used and to de-

A. State Certification; Continuing Concern for Duplication The state certification process often turns on the issue of new facility construction in a carryover from the duplicative nature of the early utility competition practices. Duplication can be avoided by multiple-supplier use of existing facilities and pro rata sharing of any costs needed for expansion or administering the enhancement of metering and accounting practices. 2° Bus companies and garbage collectors, for example, each provide public services which are physically dependent on separate equipment, either owned or leased. It is not so with the delivery of electric energy and communications services. Competitors in home entertainment--wire or satellite delivery---do use different equipment. But technology is on the threshold of joint use of wires, poles and conduit to serve user needs for voice and data commu-

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nication, home shopping and banking, meter reading and control of on-site energy consumption. What rationale justifies the denial to a community of options in its choice of electric energy resources? Two examples are illustrative. In N e w York, a renewed franchise limited distribution to customers who could be served directly from the franchisee's lines in the interest of avoiding duplication. 21 The design of Florida's "Territorial Agreements and Disputes for Electric Utilities,"22 was based on the expectation that utility-devised agreements to divide service territories would: (1) set reasonable prices for facilities transferred; (2) not decrease service reliability; and (3) provide a reasonable likelihood of eliminating existing or potential duplication of facilities.23Case law and statutes overlook the concept of competition without duplication. n Michigan, too, statutory certification is intended to allow the PSC to prevent needless multiplication of utility services in the same area, avoid wasteful duplication, keep investment to the lowest level and exclude competition when required by the public convenience and necessi~ In 1990, Consumers Power was refused approval to provide standby service to a customer inside the city where Alpena Power held the franchise.24Though the PSC ruled that a franchise is a precondition for its certification, Consumers Power neither owned nor operated facilities within the Village of I-lillrnan. The utility was simply

transacting business in the franchise area by virtue of the QF customer's interconnection to a Consumers line in the neighboring township. The circumstance suggests that this state's constitution would require any supplier intending to provide some portion of the energy consumed within a political subdivision to first secure a franchise, whether or not it owns facilities using public ways. This approach clearly indicates that permission to transact a busi-

A franchise is neither exclusive nor permanent for the indefinite future where circumstances warrant reassessment.

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ness does not require the provider to erect and own facilities using public streets and alleys within the municipal boundaries. The Illinois statute cited above, 25expressly recognizes this reality. B. Franchise as a Feasible, Non-Exclusive Right

While the memorialized fear of duplication may still shape state policies, it is also apparent that the franchise is not carved in stone. There is no reason to doubt that suitable solutions which reflect and respect local priorities without offending state constitu-

tions or national policy can come from this diversi~. The Colorado courts have determined that a franchise is not perpetual, but rather a continuing, state-granted privilege which can be altered or withdrawn when the state wishes. 26All certificates of convenience and necessity issued by the state utility commission may be altered, amended or revoked upon a proper s h o w i n g . 27 Moreover, when the Colorado PSC is considering a certification it is required to ascertain if there is another method available to achieve the same end at a lower cost.2a a Texas city able to deny renewal of a utility franchise can likewise condition any renewal on terms more restrictive than in the original franchise. ~ The Utah Public Service Commission had authority to approve a new electric service connection where the company had a pre-existing power source nearby, despite the grant of a franchise to another utility. A franchise is neither exclusive nor permanent for the indefinite future where circumstances warrant reassessment, a° An Alabama statute authorizing the formation of a gas utility district did not violate the state's constitutional provisions against monopolies, providing the statute was not interpreted as granting exclusive franchises.31 A N e w York State Public Service Commission opinion favoring non-utility access to utility transmission facilities stated:

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Given this declaration of polic34 all foreclosures of QF access to utilities' transmission and distribution lines are presumed to be contrary to state polic~ and are thus not immunized from the federal antitrust laws. Utilities that wish to block QFs' wheeling proposals must demonstrate to us that the presumption should not apply to a given proposal. 32 Connecticut's regulatory commission concluded in September 1994 that: (1) delivery of power to a retail customer from a source other than the utility in whose franchise area the user is located is technically feasible, and (2) the agency is presently able, by statute, to approve such arrangements. 33 While access to the means of delivering the product has been defined in terms of wheeling, the concept need not be structured in this fashion. 34Local governments possess the authority to prescribe where, w h e n and how poles, wires and ancillary facilities can be erected, utilized or relocated. It follows logically that an ordinance can stipulate the manner in which that equipment will be used in providing the service it is designed to deliver to the public. The kilowatts and kilowatt-hours they carry need not be supplied from resources Utility A owns or holds title to simply because A o w n s the poles and wire. C. F r a n c h i s e as a C o n d u i t

In Connecticut, it was recognized that w h e n an electric company's charter authorizes it to sell power to another utility for use in the latter's franchise area, that

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authori~, in effect, extends the franchise area of the former, as Franchises granted by cities and villages in North Dakota which did not conform to state requirements that a certain percentage of native gas be distributed for use in the communities were unlawful until amended. 36Plainl~ North Dakota recognized that energy resources are diverse and can be mixed in serving the public under a franchise. Natural gas is fungible energy available for distribution and consumption with-

The kWh carried over a utility's wires need not belong to that utility just because it owns the wires.

out duplication of facilities. So are kilowatt-hours. 37 In Florida, rationalizing the exclusion of franchise fees from a utility's operating expense, the Public Service Commission determined that a franchised utility is merely a conduit for collecting the fee from customers and delivering the revenue yield to the municipality granting the franchise. 38 A utility in Texas was ordered to revise its franchise tax collection so as to bill directly the customers within the taxing community and exclude those outside the franchise area. 39The conduit concept

suggests an irresistible analogy to distinguish by source and account for electricity delivered to retail customers within a franchise area without any duplication of poles and wires. ichigan recently initiated an experiment under which two major utilities would deliver power produced by other suppliers to large retail customers within their respective service areas. 4° California is likewise exploring the means to achieve a transition in its approach to bring supply options to users of electrici~. The focus is on the size of specific retail loads within franchise areas; the big customers with the potential to "defect." The Michigan retail wheeling experiment is being opposed by Detroit Edison on the basis that the state commission order violates the Supremacy Clause of the U.S. Constitution. The Federal Power Act does indeed give jurisdiction over transactions in interstate commerce to the FERC. However, the Michigan PSC, in addition to challenging federal court jurisdiction over what it sees as its own lawful prerogatives, contends that the federal courts should abstain and show deference to state proceedings of this nature. 41 In these cases the franchised utility service distributor has been made to track the volume of separate energy supplies serving the public, as well as to distinguish whether a customer is situated within or without a specific service area w h e n structuring appropriate rates. These examples focus on the utilities" service to major

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energy users. But they fail to recognize the franchise and the citizen right to describe or condition the distribution service the grantor of the franchise desires. The requisite scheduling technolog~ and the means to meter retail deliveries and maintain an accurate paper trail for billing purposes are available to the electric industry toda)a

D. Franchise Negotiation A franchise is a contract. As with any contract, its terms are negotiable. An Illinois utility's use of lower rates in negotiating a franchise was deemed sufficient justification for the limited availability of a lower rate and the difference between that rate and what it charged other utilities. 42 In Missouri, the state commission granted a retail customer request for a partial change in suppliers. In doing so it rejected an argument that the state statute governing changes in suppliers made no mention of "partial" service. In the commission's view, if the state's legislature intended prohibition of "partial" service from a supplier it would have said so.43 The "state action" lesson that express legislative declaration followed by active supervision of utility conduct is required of the state before immunity will attach is demonstrated by the Missouri commission. Franchises for electric service, unfortunately; have been viewed simply as a source of income to support other municipal purposes. But the doctrine's importance for utilities has been

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recognized. In the previously cited opinion, New York's Public Service Commission made clear that its regulation of electric utilities was not to be held up as a defense against antitrust challenges.44Under the PSC interpretation the state, by statute, is on the side of competition. While the grant of a municipal franchise must comply with the terms of the state constitution,45 those who are engaged in planning for enhanced competition in the electric utility industry seldom look to the state constitution

to see what options are available to its citizens to influence the process.

VI. An Example of Negotiation The 1992 franchise under which V'trginia Electric and Power Co. serves the City of Alexandria illustrates franchise options and the constraints on negotiation.46An operating agreement is a part of the package. The rights and privileges granted by Alexandria under this franchise are not exclusive, and the State Corporation Commission maintains jurisdiction over

rates under which service is provided. More to the point, an Operating Agreement includes a provision on local generation (Article V. Cogeneration Facility). Should the city acquire an existing cogeneration facility located within the city limits, or similar future projects, the city intends to "provide some or all of the electric power produced by such facilities to the Company; at no cost to the Company; in exchange for a like amount of power supplied by the Company; to designated City facilities, at no cost to the Cit3a." The Operating Agreement's corresponding provision is simply that Virginia Power "is not currently in a position to reach such an agreement" but "is willing to commit to discussions." It is a simple matter to credit the power received from the city against the bills rendered by the company for service to the city facilities presently receiving company power. 47 This approach eliminates the hassle over "avoided cost" which has embroiled many jurisdictions when a purchase from a QF is proposed. hould the company refuse to agree, Alexandria would have to determine the feasibility of building a distribution line from the generator(s) to the city facilities it intends to supply from this alternate source of power. The next questions under the "bottleneck" test would be: (1) whether a practicable and perhaps less costly alternative exists, namely, use of the company's distribution lines; and (2) whether

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such an arrangement would prove so financially detrimental as to impair the company's ability to continue service to its remaining customers. Valid answers to these questions can be part of a franchise negotiation. The ultimate question is: When does the claimed inability or apparent unwillingness of a franchisee to grant access to its distribution lines become an actionable denial of access? At the time of renewal? One year after a request? Never? The Alexandria situation is by no means unique. In Texas, Galveston, Houston and other suitably sized dries are "home rule" political subdivisions. The franchise granted by the City of Galveston to Houston Lighting & Power is non-exclusive.4s The City

of Houston has retained original jurisdiction over the same supplier's rates and service consistent with the limits of its charter, the state's constitution and general laws. Appeal of the city's decisions can be taken to the Texas Public Utility Commission. 49This protection for the franchisee and the city's ratepayers should be an invitation for the communities to explore the range of possible measures they have available to move retail service arrangements toward a more-competitive environment.

VII. Conclusion Franchises can comprise the core of relevant, legitimate requirements to guide renewed efforts to shape the future structure

An open access franchise--more rare than an eclipse?

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of, and direction for, the indus~.s0 The authority of municipalities to initiate lawful measures aimed at achieving greater competition for both large and small customers in the franchise area deserves much greater attention than it has received in the past. As in Missouri, the potential for partial retail supply from the franchised company was deemed permissible, feasible and in that state's public interest. The Connecticut view is fully consistent: If a utility sells power off its system that is destined to serve retail customers elsewhere, the seller's de facto franchise is extended. lectric energy produced for sale is a commodity desfined for delivery to consumers. A franchise is a permit to do business in designated areas. Connecticut has apparently acknowledged that a wholesale supplier need not hold a retail franchise in all the locations where its commodities are delivered by a middleman-jobber to the points of consumption. In Michigan, a producer need not o w n distribution facilities as a condition of securing a franchise to do business within a communi~. Illinois permits nonowners to utilize facilities owned by another franchisee. Throughout the continuous debate over industry structure and competition there is neither prominent mention of, nor any meaningful challenge to, the underlying premise that retail customers, except major industrial consumers, must take all their requirements from resources owned or operated by the franchise

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holder. M a n y m i g h t say that such

tification of facilities a n d franchise

an obligation exists, b u t will pre-

areas, despite the w i d e r a n d m o r e

sent the a r g u m e n t as being en-

flexible choices that are n o w avail-

compassed b y the regulatory com-

able t h r o u g h technological ad-

pact or as the sine qua non of

vances of recent years.

public service, including reliabil-

The question is: Will the distrib u t i o n system become a wide-

A

s the debate continues, it

m o u t h jar, quenching the large re-

m u s t be a c k n o w l e d g e d

tail customers' thirst for energy

that this ball of w a x is comprised

on competitive terms, b u t remain

of two distinct e l e m e n t s - - c o m -

a bottleneck for smaller customers

modities a n d services. While both

w h o are perceived to have no alternative b u t to c o n d e m n the bot-

are bargained a n d paid for o n the basis of cost, c o m m o d i t i e s are funs u m e d , while services are not. In theory a n d largely in practice, commodities--kWs and k W h s - can be p u r c h a s e d from a n y seller. Services--the control or operational m a n a g e m e n t a n d delivery of the c o m m o d i t i e s - - m u s t of course be suitably located a n d sized. But transmission a n d distrifunctions, being neither p r o d u c e d nor c o n s u m e d , b u t u s e d w i t h the permission of the owner. So, while one issue is w h o s e commodities the user m a y bu}~ perhaps the m o r e critical issue is h o w

tie a n d get into the electric distri-

the commodities can be delivered

b u t i o n business for themselves? •

to the point of use.

t h o u g h s o m e interested parties choose not to d r a w attention to it. Historically, o w n e r s h i p of the service facilities a n d title to the commodities w e n t h a n d - i n - h a n d as elements of a vertically integrated franchised utility structure. That structure

w h i c h of course

Endnotes:

1. The occasions for franchise renewals within a state are distributed over time. This fact fits nicely with the asserted need for a period of transition to explore and achieve competition in retail markets, as contemplated by the well-publicized undertakings in California and Michigan. See Michigan Tremor Precedes Cal. Regulatory Earthquake, ELEC.J., June 1994, at 7. 2. LEONARD S. HYMAN, AMERICA'S ELEC-

is not i m m u t a b l e - - u n d e r l i e s

TRIC UTILITIES: PAST, PRESENT AND FU-

m u c h of the content a n d interpre-

TURE at

tation of state laws g o v e r n i n g cer-

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SUES RELATING TO THE RETAILWHEELING OF ELECTRICITY 52, 75 ( M a y 1994).

5. One commentator described it thusly: Franchises in a city often were none×clusive and sometimescompetitive.... Companies had differentpurposes: arc lighting for streets, lighting for houses, power for industrial uses. In the same cit~ voltagesand frequenciesdiffered. In Chicagobetween 1882 and 1905,29 franchises had been granted, three of which were citywide.

Hyman, supra note 2, at 67.

bution are in a sense "passive"

fully u n d e r s t a n d this distinction,

4. NATL. REG. RES. INST., OVERVIEWOF IS-

In Chicago,the city councilwas notoriously corrupt and the franchisenegotiation centered around payoffs.At one point a citywidefranchisewas granted to a group for no other purpose than to have the franchisebought out by a competitor.... In a perverse way,however, the confusionand fragmentation created a healthy competitionthat prevented the technologyof the electric utility industry from ossifyingin its first decade and that caused the entrepreneurs who ran the utilities to experiment in the way they did business.

gible: T h e y are p r o d u c e d a n d con-

Legislators a n d regulators m u s t

3. D.W. Penn, Change: The Old and New World of Competition (Am. Pub. Power Ass'n, Aug. 26, 1994).

6. According to another commentator, those with an "enormous stake" in the status quo and therefore opposed to regulatory changes are: environmentalists fearing diminution of their ability to impose uneconomic programs on consumers; utilities with large stranded investments; customers fearing such costs will end up in their backyards; unions anticipating that the fruits of a bilateral monopoly will sour; regulators afraid that their power to protect residential customers from "monopoly extortion" will be eroded; and legislators concerned that they will no longer be able to control events. I. M. Stelzer, Restructuring the Electric Utility Industry: Further Tentative Thoughts, ELEC.J., Oct. 1994, at 36. 7. Thirty-eight states require a certificate of convenience and necessity for establishing retail service areas. NRRI Report, supra note 4, at 52.

3 (Public Utilities Reports, 2nd ed., 1985).

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8. Oklahoma Gas & Electric Co. v. Oklahoma Electric Cooperative, Inc., 577 P.2d 1127 (1973). 9. The doctrine started with California raisins marketed under a state-approved plan ultimately deemed immune from federal antitrust laws, Parker v. Brown, 317 U.S. 341 (1943), and moved east to Michigan where a utility's program of supplying replacement light bulbs without charge was ruled unlawful by the Supreme Court in Cantor v. Detroit Edison Co., 428 U.S. 579 (1976), because there was insufficient supervision of the utility's program by the state--or was it because it wasn't required by the state?

Press v. U.S., 326 U.S. 1 (1945); Gamco v. Providence Fruit & Produce Building, Inc., 194 E2d 484 (1st Cir. 1952), cert. denied, 344 U.S. 817 (1952). From Associated Press and Terminal Railroad came the belief that the facility needed multiple owners/members to constitute a bottleneck. This is not the case. See Otter Tail Power Co. v. U.S., 410 U.S. 366 (1973); Byars v. Bluff City News, 609 E2d 843 (6th Cir. 1980); TV Signal Co. v. AT&T, 617 E2d 1302 (8th Cir. 1980). 16. See MCI Communications Corp. v. AT&T, 708 E2d 1081 (7th Cir. 1983). A

10. In 1918 Justice Brandeis observed: The history of the restraint [on competition], the evil believed to exist, the reason for adopting the particular remedy, the purpose or end to be obtained, are all relevant facts. This is not because a good intention will save an otherwise objectionable regulation or the reverse; but knowledge of intent may help the court to interpret facts and to predict consequences.

the kind of "deal" that franchise negotiation could devise. 18. See American Electric Power Service Corp., Docket No. ER93-540, 67 FERC 61,138 (1994). 19. As the NRRI Report notes, supra note 4 at 45, n. 92, wholesale and retail wheeling are functionally identical. Regulation of the two concepts is where the dispute over inter- and intra-state transmission jurisdiction rages. 20. Connecticut summed up its view of natural monopoly this way: "Because of the unique cost (and to a lesser extent, demand) conditions, economic theory tells us that the existence of additional competitive producers would result in wasteful and redundant allocation of resources, driving up the cost of the good." Re Investigation into Retail Electric Transmission Service, Docket No. 93-09-29, Sept. 9, 1994. (155 PUR4th 209, 225.) 21. Re Niagara Mohawk Power Corp., 16 PUR3rd 171 (1956).

Chicago Board of Trade v. U.S., 246 U.S. 231, 238.

22. PSC Order No. 321776, 107 PUR4th 215 (1989).

11. W. Primeaux, Some Problems With Natural Monopoly, 24 ANTITRUSTBULL.

23. Florida utilities have had a history

63 (1979). 12. Economic theory driving rate analysis 30 years ago is still a bulwark for those protecting utility retail turf from competition by duplication. When an electric utility is "compelled to share its limited market with two or more rival plants owning duplicative distribution networks, the total cost of serving the city would be materially higher." I. c BONBRIGHT,PRINCIPLESOF PUBLICUTILITYRATESat 13 (Columbia Univ. Press, 1961). 13. P. AREEDA,ANTITRUSTANALYSIS:PROBLEMS,TEXT,CASES53-54(Little Brown & Co., 1967). 14. A.E. Kahn, Can Regulation and

Competition Coexist? Solutions to the Stranded Cost Problem and Other Conundra, ELEC.J., Oct. 1994, at 26. 15. See, e.g., U.S.v. Terminal Railroad Ass'n, 224 U.S. 383 (1912); Associated

May 1995

switching service monopoly was used to maintain market power in long distance service. The court held that the natural monopoly was the essential service MCI needed and from which it could not lawfully be excluded. 17. The Illinois Code, 220 ILCS 5/8562 (Joint Use of Facilities) provides that non-owners can be granted use of poles, wires and conduits, etc. The conditions on such use are that the owner's public duty not be impaired, that suitable compensation be made and that the owner and other users not suffer "irreparable damage." If the parties cannot agree, the Illinois Commerce Commission is to make findings after a hearing. This is precisely

of dividing territories contrary to federal antitrust law. U.S.v. Florida Power Corp., 1971 Trade Cases (CCH) Par. 73,687 (M.D. Fla. 1971); Gainesville Utilities Dept. v. Florida Power & Light Co., 573 F 2d. 292 (5th Cir.), cert. denied, 439 U.S. 966 (1978). Other utilities have run afoul of the same policy. Montana-Dakota Utilities Co. v. Williams Electric Cooperative, 263 E2d 431 (Sth Cir. 1959). 24. Re Alpena Power Co., 111 PUR4th 458 (1990); In re Consumers Power Co., 130 PUR4th 555 (1992). 25. Supra, note 17. 26. City of Englewood v. Mountain States Teleph. & Teleg. Co., 163 Colo. 400, 431 E2d 40 (1967). 27. Re Poudre Valley Rural Elect. Ass'n., App. Nos. 19574 et al., Case No. 5234, Decision No. 62653, April 22, 1964.

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A consumer-owned utility has the right and privilege to select its own source of power so long as its decision is reasonable and prudent and consistent with the public interest. Re Colorado-Ute Electric Association, 48 PUR3rd 113 (1963). 28. Western Slope Gas Co., Decision No. 72966, App. No. 23545, May 1, 1969. 29. City of Garland v. Texas Power & Light Co., 405 SW2d 380 (1966). 30. Empire Electric Association, Inc. v. Utah Public Service Commission, 604 E 2d 930 (1979). 31. City of Andalusia v. Southeast Alabama Gas District, 261 Ala. 297, 74 SO 2d 479 (1954). Monopoly is not an essential feature of a franchise. Knoxville Water Co. v. Knoxville, 200 U.S. 22 (1906). Whatever is not unequivocally granted under a franchise is deemed to be withheld; nothing passes by implication. Piedmont Power & Light Co. v. Town of Graham, 253 U.S. 193 (1920).

37. Today electric suppliers at retail routinely provide service from resources they own and power purchased from others. The supplier's resource mix may vary over time, but it is not preordained that only the franchised distributor can purchase from another source. 38. Re Florida Power & Light Co., 9 PUR4th 146 (1975). 39. Re Houston Lighting & Power Co., 36 PUR4th 94 (1980). See also, Illinois Commerce Commission v. Commonwealth Edison Co., 155 PUR4th 17 (1994). 40. Mich. Pub. Serv. C o m m ' n Cases U-10143 and U-10176 (1994).

34. Wheeling and contract path concepts are legal fictions. Their use as paper descriptions of electric power system behavior or predicates for cost allocation and recovery does not warrant their use to bar competitive opportunity. 35. Wilson Point Property Owners Ass'n v. Connecticut Light & Power Co., 145 Conn. 243, 140 A.2d 874 (1958). 36. Re Montana-Dakota Utilities Co., 11 PUR3d 352 (1955).

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45. Oklahoma Gas & Electric Co. v. Total Energy, Inc., 449 E 2d 917 (1972). 46. Ordinance No. 3580 (effective July 1, 1992). The ordinance is accompanied by an Operating Agreement detailing the scope of cooperation and coordination expected: periodic reports from the franchisee on its activities; quarterly meetings with the city government to outline scheduled work plans; handling citizen complaints; service arrangements for an historic district. 47. This kind of billing adjustment is common where the supplier of power is a federal marketing agency, or the party requesting such an adjustment holds entitlement in a resource located outside the franchise area. Examples include TVA arrangements with Alcoa and Tapoco (see Nantahala Power & Light Co. v. Thornburg, 476 U.S. 953 (1986)) and the disposition of power from the Niagara, Pick-Sloan and Denison Dam Projects. 48. "Nothing contained in this ordinance shall ever be construed as conferring upon Company any exclusive rights or privileges of any nature whatsoever." (Sec. 9). The franchise, effective on January 1, 1958, is for a term of 50 years. (Sec. 2).

32. N.Y. Pub. Serv. Comm'n, Opinion and Order Concerning Bidding, Avoided-Cost Pricing and Wheeling Issues, No. 88-15, June 3, 1988. 33. Re Investigation into Retail Electric Transmission Service, Docket No. 9309-29, Sept. 9, 1994. "The Department [of Public Utility Control] believes its enabling statute is sufficiently flexible to permit us to create necessary policies regarding utility services to implement the authority granted .... " (155 PUR4th at 221-22).

44. Supra, note 32.

49. Vernon's Ann. Tex. Civ. St., Arts. 1438, 1446c.

41. U.S. District Court (W.D. Michigan), File No. 5:94-CV-123; Mich. PSC

Sets 150 MW Retail Wheeling Experiment, ELEC.DAILY,April 13, 1994. 42. Citizens Utilities Co. of Illinois v. Illinois Commerce Commission, 50 Ill.2d 35, 276 NE2d 330 (1971). 43. Re Cominco American, Inc., 92 PUR4th 438 (1988). In Oregon, when the terms of the franchise are ambiguous or doubtful they are to be strictly construed against the grantee. Re Urban Renewal Agency of City of Eugene, 23 Or App 384, 542 P.2d 908 (1975).

50. State political subdivisions continue to exercise their authority to pass ordinances granting, renewing and conditioning franchise rights. The state's utility regulatory agency may, or must, endorse the franchise contract b y issuing a corresponding certificate of convenience and necessity. The design of retail service provided to the consuming public by a municipality includes: (1) the nature and extent of any protection the community can and may choose to grant the franchisee; (2) the specific and permissible requirements imposed on the franchise holder; and (3) reconciliation, as may be appropriate, with policies pursued b y the cognizant state agency.

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