Monopolization Issues

• Pages: 167-203

167

CHAPTER IX

MONOPOLIZATION ISSUES

Energy utilities traditionally were viewed as natural monopolies, and

thus granted the exclusive right to serve a defined territory subject to

regulatory oversight by state utility commissions. So long as the utility

was subject to active state supervision, its conduct generally was immune

from antitrust scrutiny under the state action immunity doctrine.608

Deregulation, however, brings with it a corresponding loss of this

protective immunity. As deregulation progresses, claims of abuse of

monopoly power may become increasingly common, both as a means for

challenging efforts of traditional suppliers to retain or expand market

share, and for contesting new arrangements to market energy and energy

services.

A. Possession of Monopoly Power in the Relevant Market

Market shares often are used as a proxy or first screen to determine if

a party possesses market power.609 The precise market shares required

are a matter of some dispute: “While the Supreme Court has refused to

specify a minimum market share necessary to indicate a defendant has

monopoly power, lower courts generally require minimum market share

of between 70% and 80%.”610 A market share below 50 percent generally

is insufficient to establish market power.611 In regulated industries,

market share is not as good an indicator of market power as in other

608. See Parker v. Brown, 317 U.S. 341 (1943); Chapter IV, supra . So long as

the state continues to actively supervise the delivery of electricity,

identity of the “monopolist” will not have antitrust consequences. See

Columbia River People’s Utility District v. Portland General Electric

Co., 2000-1 Trade Cas. (CCH) ¶ 72,920 (9th Cir. 2000); the Oregon PUC

approved a settlement of a condemnation action resulting in transfer of

property. The condemnation is restriction on competition. Only the name

of the monopolist changed.

609. See also discussion of market power in Chapter V.

610. Colorado Interstate Gas Co. v. Natural Gas Pipeline Co., 885 F.2d 683,

694 n.18 (10th Cir. 1989).

611. U.S. Anchor Mfg. v. Rule Indus., 7 F.3d 986, 1000 (11th Cir. 1993).

168 Energy Antitrust Handbook

industries, and may overstate the ability of a party to control prices and

reduce output.612

Market share is useful only as a first step in analyzing whether

market power exists. In determining the necessary market share, a court

will examine a series of market characteristics, including the size and

strength of competitors, barriers to entry, the degree of concentration,

profit levels, and whether the market share of the challenged party has

increased in recent times.613 The inaccuracies that result from the static

market share analysis can be overcome by looking at other factors

affecting the parties’ ability to collude or exercise market power. Market

shares must also be viewed in the context of fundamental changes

occurring in the structure of the relevant market.614 Where, for example,

the structure of the electricity or gas market is changing dramatically,

current market shares could overstate market power.

A number of factors complicate the determination of relevant

product and geographic markets for monopoly claims in today’s energy

industry. As a result, market definition issues likely will be contested

vigorously in such cases. One result of deregulation is that gas pipeline

and electric transmission grid operating functions that previously were

viewed as part of a single product market now may be considered

separate markets. Generation, transmission, and distribution functions,

which a single, vertically integrated utility formerly performed, now may

be unbundled. Companies that previously offered only natural gas or

electricity now may offer both. Previously regulated entities, directly or

through an affiliate, also may begin to offer nonregulated energy

services, including energy management programs, energy efficiency

equipment, electric system repair, home-appliance repair, environmental

services, and lightbulbs.

612. Consolidated Gas Co. v. City Gas Co., 880 F.2d 297, 300 (11th Cir.

1989), reinstated on reh’g, 912 F.2d 1262 (11th Cir. 1990) (en banc; per

curiam), vacated as moot, 499 U.S. 915 (1991).

613. Oahu Gas Serv. v. Pacific Resources, Inc., 838 F.2d 360, 366 (9th Cir.

1988).

614. See United States v. General Dynamics Corp., 415 U.S. 486, 501 (1974).

Chapter IX 169

Technological changes could ease entry into the electricity market,

for example, by creating new opportunities for self-generation or

cogeneration. New technology also may create the potential for

additional generation capacity even in an existing market.615

The unique characteristics of electricity make determining the

relevant market especially challenging. Electric energy cannot be stored.

The demand for electricity varies day by day as well as seasonally. Some

customers need reliability, others focus on lower prices. Some customers

need power at times of peak demand while others are able to purchase

off-peak.616 Therefore, product-market analysis will need to take into

account such factors as time, reliability, and interruptibility. The

continuous need to balance supply and demand in the electric industry

means that the ability to exploit market power can shift even during the

course of a single day and might make even half-hour-by-half-hour

product markets relevant.617 Innovations like time-of-day metering could

reduce transmission congestion and therefore market power.618

For geographic market determinations, a utility’s former service

territory is not necessarily the relevant market. Deregulation will allow

competitors from other states or territories to enter and serve that area.

As deregulation progresses, the issue of which entities potentially can or

do compete in a particular area will need to be continually revisited. For

example, greater transmission access can broaden the relevant

geographic market even if there is no new generation capacity.619

Markets might span several states, and might even be international to the

615. See, e.g., Comment of Staff of Bureau of Economics, Federal Trade

Commission, before Louisiana Public Service Commission Regarding

Market Structure, Market Power, Reliability and ISOs, Docket No. U-

21453 (May 15, 1998).

616. See Statement of Robert Pitofsky, Chairman, Federal Trade Comm’n,

Testimony before House Judiciary Comm. (June 4, 1997), available at

www.ftc.gov/os/1997/9706/electric.htm.

617. See, e.g., Comment of Staff of Bureau of Economics, Federal Trade

Comm’n, before FERC Inquiry Concerning Commission Policy On ISOs

(May 1, 1998).

618. See, e.g., Comment of Staff of Bureau of Economics, Federal Trade

Comm’n, before Public Service Commission of West Virginia,

Charleston, Case No. 98-0452-E-GT (July 15, 1998).

619. Id.