Monopolization Issues

• Pages: 127-162

127

CHAPTER VI

MONOPOLIZATION ISSUES

Monopolization is prohibited by Section 2 of the Sherman Act.

1

Mere size is not illegal, however. A violation requires both (1)

possession of monopoly power in the relevant market and (2) the willful

acquisition and maintenance of that power as distinguished from growth

or development resulting from historical accident, business skill, or a

superior product or service.

2

Determining whether a violation has

occurred generally requires a searching fact inquiry under the rule of

reason.

3

In addit ion, to assert a claim private plaintiffs must also

demonstrate that the anticompetitive conduct at issue resulted in an

“antitrust injury,” rather than some other type of harm to the plaintiff.

4

Energy utilities traditionally have been 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.

5

Deregulation, however, brings with it a

corresponding loss of this protective immunity.

6

As deregulation

progresses, claims of abuse of monopoly power may become

increasingly common, both as a means f or challenging efforts of

1. 15 U.S.C. § 2; Verizon Commc’ns Inc. v. Law Offices of Curtis V.

Trinko, LLP, 540 U.S. 398, 407 (2004); Elliott Ind us. Ltd. v. BP Am.

Prod. Co., 407 F.3d 1091, 1124 n.30 (10th Cir. 200 5).

2. Trinko, 540 U.S. at 407; City of Moundridge v. Ex xon Mobil Corp., 471

F. Supp. 2d 20 , 41 (D.D.C. 2007); United States v. Grinnell Corp., 384

U.S. 563, 570-71 (1966).

3. United States v. Chi. Bd. of Trade, 246 U.S. 231 (1918).

4. See, e.g., Atl. Richfield Co. v. U SA Petroleum Co., 495 U.S. 328, 344

(1990).

5. See Chapter III.A for a discussion of state action i mmunity.

6. Of course, so long as the sta te continues actively to supervise the delivery

of electricity pursuant to a clearly articulated state policy to displace

competition, state action imm unity will still apply. See, e.g., Snake River

Valley Elec. Ass’n v. Pac ifiCorp, 357 F.3d 1042, 1049-50 (9th Cir. 2004 )

(defendant electric company’s refusal to wheel was protected by state

action immunity).

128 Energy Antitrust Handbook

traditional suppliers t o 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 share often is used as a proxy or first screen to determine if a

party possesses market power. The precise market share required has not

been specified by the Supreme Court, but “lower courts generally require

minimum market share of between 70% and 80%.”

7

A market share

below 50 percent generally is insufficient to establish market power.

8

In

regulated industries, in which an entity’s market share may result f rom

regulation, rather than conduct in the marketplace, some courts have held

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

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

reduce output.

9

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.

10

In the coal industry, for example, to

determine market share and market concentration, courts have examined

7. Colo. Interstate Gas Co. v. Natural Gas Pipeline Co., 885 F.2d 683, 694

n.18 (10th Cir. 1989); see also Metronet Servs. Corp. v. U S West

Commc’ns, 329 F.3d 986, 1003 (9th Cir. 2003) (stating courts generally

require a 65% or greater market share to establish prima facie market

power), vacated on other grounds, 540 U.S. 1147 (2004).

8. See, e.g., United States v. Dentsply Int’l Inc., 399 F.3d 181, 187 (3d Cir.

2005) (absent other pertinent factors, a share significantly larger than

55% has been required to establis h prima facie market power); U.S.

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

9. Metronet, 329 F.3d at 1003 -04; see also Consol. 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. 91 5

(1991).

10. Oahu Gas Serv. v. Pac. Res., 838 F.2d 360, 366 (9 th Cir. 1988);

Natsource LLC v. GFI Group Inc., 332 F. Supp. 2d 626, 635 (S.D.N.Y.

2004) (even market shares of 50% are insufficient to deter mine market

power where ot her factors such as low barriers to entry and strong

competition exist).

Monopolization Issues 129

coal reserves, loadout, production, and practical capacities.

11

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. For example, in an order on rehearing

in AEP Power Marketing Inc.,

12

the Federal Energy Regulatory

Commission (FERC) established two indicative screens for assessing an

electric generation supplier’s market power when the supplier applies to

be allowed to establish market-based rates. The first, called a pivotal

supplier analysis, focuses on the ability to exercise market power

unilaterally by measuring market power at peak times.

13

The second is

an analysis of the uncommitted market share measuring whether a

supplier has a dominant position in the market on a seasonal basis.

14

Both analyses also consider a supplier’s native load obligations and other

commitments.

15

Market shares must also be viewed in the context of fundamental

changes occurring in the structure of the relevant market. Where, for

example, the structure of an energy market is changing dramatically,

current market shares could overstate market power.

16

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 has been 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. Companies that offer electricity also may own coal

11. Fed. Trade Comm’n v. Arch Coal, Inc., 32 9 F. Supp. 2d 109, 127-28

(D.D.C. 2004).

12. 107 F.E.R.C. ¶ 61,018, 61,054-55 (2004).

13. Id. at 61,061.

14. Id.

15. Id. at 61,055; see also Wis. Pub. Power Inc. v. Fed. Energy Regulatory

Comm’n, 493 F.3d 239, 251 (D.C. Cir. 2007) (independent electricity

transmission system operator created market power mitigation measures

that reduced seller electricity generators bids if they exceeded certain

“conduct” and “impact” thresholds that were defined in relation to an

estimate of the seller’s marginal costs).

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