PENNSYLVANIA’S "DEREGULATED" GENERATION MARKET, THE SHERMAN ACT, AND THE RELEVANCE OF STATE ACTION IMMUNITY

George A. Bibikos

And the freedom guaranteed each and every business, no matter how small, is the freedom to compete—to assert with vigor, imagination, devotion, and ingenuity whatever economic muscle it can muster.1

TABLE OF CONTENTS

Introduction....................................................................................................................................................1I. THE ELECTRIC POWER INDUSTRY GENERALLY..........................................................................................5

A. The Product of Electricity...................................................................................................................6B. The Process: From Generation to Consumption................................................................................7C. Traditional Regulation of Generation, Local Distribution, and Transmission..................................7

II. PENNSYLVANIA’S RESTRUCTURING ACT...................................................................................................8A. The New Competitive Generation Market..........................................................................................9B. Ongoing Regulation Despite the Restructuring Act..........................................................................11C. Antitrust Activity in Light of Pennsylvania’s Restructuring.............................................................12

III. SHERMAN ACT LIABILITY GENERALLY.................................................................................................13A. Monopoly Power in the Relevant Market.........................................................................................15B. Willful Acquisition or Maintenance of Monopoly Power.................................................................18C. Leverage Theory of Liability............................................................................................................19

IV. STATE ACTION IMMUNITY GENERALLY................................................................................................20A. Clear Articulation: The State Itself and Clarity of State Policy.......................................................21B. Active Supervision by the State.........................................................................................................23C. Effect of Electric Utility Cases on the Doctrine of State Action Immunity.......................................23

V. LEVERAGE THEORY LIABILITY IN THE GENERATION MARKET: A PROPOSED ANALYSIS......................24A. Monopoly Power Used to Gain an Advantage in the Generation Market........................................25B. Monopoly Power Used to Attempt to Monopolize the Generation Market......................................26C. Monopoly Power Used to Actually Monopolize the Generation Market.........................................26

VI. STATE ACTION IMMUNITY: CAN THE DOCTRINE STILL APPLY?...........................................................27A. Clear Articulation in Pennsylvania’s Restructuring Act..................................................................27B. Active Supervision Under Pennsylvania’s Restructuring Act...........................................................29

Summary and Conclusion............................................................................................................................29

* * *INTRODUCTION

In the electricity industry, competition2 and free enterprise are relatively contemporary

ideas, as traditional economic regulation of this industry has been the primary responsibility of

1 United States v. Topco Assocs., Inc., 405 U.S. 596, 610 (1972) (describing the antitrust laws as the "magna carta of free enterprise").

2 Standard Oil Co. v. Fed. Trade Comm’n, 340 U.S. 231, 248 (1951) ("The heart of our national economic policy long has been faith in the value of competition.").

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state and federal regulatory agencies.3 Because pervasive regulation by federal and state regula-

tory authorities thoroughly ensured reliable utility service and consumer protection,4 federal an-

titrust laws played a somewhat secondary role in the regulation of the energy industry.5 It made

sense that states were the primary regulators of electric utilities, given the local, intrastate charac-

ter of the industry and the rarity of truly interstate operations.6 Since electric utilities historically

have operated under tight regulation, conduct that otherwise fell within the scope of antitrust

laws often enjoyed "state action immunity"7 from antitrust law suits.8

Deregulation movements across the nation, however, have slowly but steadily

transformed the electricity industry from a deeply regulated industry to an industry comprised in

3 William H. Hieronymus, et al., Market Power Analysis of the Electricity Generation Sector, 23 ENERGY L.J. 1, 1 (2002) (stating that the "traditional cost-of-service regulation is being replaced by markets and competition").

4 Id. at 2 (stating that "electricity is a product that is ‘imbued with the public interest.’ Despite that it has been available to consumers for more than 100 years, it is regarded as an essential product and has been tightly regulated, not only in terms of price but also in terms of the reliability and conditions of supply."). Price regulation in the utility industry, although sometimes permitting price discrimination (an act that could fall within the prohibitions of the Robinson-Patman Act), has been an integral component of utility regulation throughout history. See, e.g., Dennis S. Corgill, Distributing Products Under the Nonprofit Institutions Act: Price Discrimination, Arbitrage, and Fraud in the Pharmaceutical Industry, 2001 BYU L. REV. 1383, 1388-89 (2001) (discussing the Robinson Patman Act and price discrimination in the utility industry):

Indeed, in the modern context of utility regulation, economic analysis, supported by a history of successful results, has shown that, by charging different prices to groups of purchasers with different demand characteristics, suppliers can provide more services to more consumers. Nonetheless, an important and historically consistent theme of the antitrust laws, of which the Robinson-Patman Act is a part, is to curb the abuse of market power. In the context of utility regulation, price regulation prevents the abuse of market power by suppliers.

Id. at 1388-89 (footnote omitted).5 See Otter Tail Power Co. v. United States, 410 U.S. 366 (1973) (despite arguments to the contrary,

holding that an electric utility is subject to antitrust regulation under § 2 of the Sherman Act).6 Ray S. Bolze et al., Antitrust Law Regulation: A New Focus for a Competitive Energy Industry , 21

ENERGY L.J. 79, 80 (2000) (noting that original energy legislation chose regulation instead of competition because lawmakers believed that local, natural monopolies could provide service "more efficiently").

7 Generally Cal. Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc., 445 U.S. 97, 105-06 (1980) (establishing the two-prong test for state action immunity). Other exemptions that could apply to the electricity industry exist as well. The Noerr-Pennington doctrine generally confers immunity to private parties that attempt to influence legislation that has anticompetitive effects. TEC Cogeneration Inc., RRD, v. Fla. Power & Light Co., 76 F.3d 1560, 1570 (11th Cir. 1996). The immunity is based primarily on the First Amendment Right to petition the government. Id. See U.S. CONST. amend. 1. The "filed-rate" doctrine generally forbids calculation of antitrust damages based on any rate that has been filed and approved by a state utility commission. See generally Keogh v. Chicago & N.W. Ry., 260 U.S. 156 (1922); Bolze et al., supra note 6, at 95.

8 Areeda and Hovenkamp point out that the state action immunity doctrine is "not merely a defense that can be offered at trial" but an immunity that "can almost always be asserted as a ‘matter of law[.]’" 1 PHILLIP E. AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW ¶ 222b, at 387 (2d ed. 2000).

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part of competitive markets;9 competitive markets that would increase consumer welfare and

decrease utility rates10 without sacrificing reliable electricity service.11 As the industry developed

structurally and technologically,12 and as studies of competitive electricity markets in Europe

caught the eye of American lawmakers,13 Congress passed laws such as the Public Utility

Regulatory Policy Act (PURPA)14 and the Energy Policy Act (EPAct),15 the first real indication

of the nation’s intent to shift the electric power industry from a regulated industry to an industry

that incorporates competition.16 The Federal Energy Regulatory Commission (FERC) rounded

out the federal government’s intent to implement competition in the electricity industry by

issuing a voluminous final order, FERC Order 888, which required owners of transmission

facilities to make such facilities accessible to competitors so unregulated competitors could enter

the market and compete in the industry.17 By 2000, roughly fifty percent of the nation’s

9 Bolze et al., supra note 6, at 80-81.10 The Pennsylvania General Assembly pointed out, in its restructuring legislation, that electricity rates

were among the highest in the nation under a completely regulatory scheme. 66 PA. CONS. STAT. § 2802 (1999).11 Bolze et al., supra note 6, at 80.12 See, e.g., New York v. Fed. Energy Reg. Comm’n, 122 S. Ct. 1012, 1018 (2002) (discussing the changes

in the electric power industry).13 See, e.g., U.S. FED. TRADE COMM’N, STAFF REPORT: COMPETITION AND CONSUMER PROTECTION

PERSPECTIVES ON ELECTRIC POWER REGULATORY REFORM ch. I.A (July 2000), at www.ftc.gov/be/v000009.htm (last visited March 21, 2003) [hereinafter FTC STAFF REPORT]. The Report discusses the United Kingdom’s "move[ment] from a nationalized, vertically integrated monopoly to a privatized and vertically unbundled industry committed to gradually opening up competition even at the retail level for both businesses and consumers." Id. The U.K. system involved three features: (1) independent electricity distributors (direct flow of electricity from utility to consumer); (2) regional transmission organizations (supplying the "grid" for transmission of high voltage from generator to distributor); and (3) independent generators (producers of electricity). Id. The United States employs a similar structure.

14 See generally Public Utility Regulatory Policy Act of 1978, Pub. L. No. 95-617, 92 Stat. 3117 (1978) (PURPA) (codified as amended in scattered sections of 16 U.S.C.).

15 See generally Energy Policy Act of 1992, Pub, L. No. 102-486, §§ 711-726, 106 Stat. 2776 (1992) (EPAct) (codified as amended in scattered sections of 15 & 16 U.S.C.).

16 PURPA and the EPAct taken together fundamentally allowed competitors to enter the wholesale generation market and authorized the FERC to pass regulations that would open the door to competition. To do so, however, would require industry restructuring—namely, requiring utilities nationwide to allow competitors access to transmission lines. That occurred with FERC Order 888. See Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, 61 Fed. Reg. 21540 (1996) [hereinafter FERC Order 888]. For a more detailed overview of PURPA, EPAct, and FERC Order 888, see Jeffrey D. Schwartz, The Use of the Antitrust State Action Doctrine in the Deregulated Electric Utility Industry, 48 AM. U. L. REV. 1449, 1472-73 (tracking the history of federal deregulation).

17 FERC Order 888, supra note 16.

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electricity industry operates with some form of competition.18

In 1996, Pennsylvania passed its form of restructuring legislation, the Electricity Genera-

tion Customer Choice and Competition Act (Restructuring Act),19 which displaced regulation of

the generation market20 with some form of competition.21 Pennsylvania’s restructuring efforts

have been placed at the successful end of the deregulation continuum22 while California’s energy

crisis represents the potential failures of deregulation.23 As is painfully evident from the crisis in

California, the shift from regulation to competition has potential shortcomings.24 Utilities in the

electricity industry have operated as monopolies for many years.25 Not surprisingly, then, the

shift to a competitive market may open the door for incumbent electric companies to manipulate

a market within which such companies have enjoyed total domination. This begs the question of

whether partly-regulated electric utilities still enjoy state action immunity in the age of deregula-

tion for alleged violations of antitrust laws.26 More specifically, the question becomes whether

state action immunity is available to generation providers in the wake of Pennsylvania’s restruc-

turing.

This article explores potential Sherman Act violations and the relevance of the state ac-

18 FTC STAFF REPORT, supra note 13, ch. I.A.19 Electricity Generation Customer Chocie and Competition Act, 66 PA. CONS. STAT. §§ 2801-2812 (1999).20 Generation is that portion of the electricity industry that "creates" electricity for transmission and ultimate

distribution to consumers. See infra Part I.A.21 66 PA. CONS. STAT. §§ 2802 (stating policy in favor of a competitive generation market).22 Gregory M. Harvey, Deregulation Done Right, THE PENNSYLVANIA LAWYER, November-December,

2001, at 40 ("Pennsylvania has thus far made the transition toward competition and lower retail prices without significant disruption, either to consumers or the commonwealth’s public utilities.").

23 For an excellent discussion on the causes of California’s "power crisis," see John C. Hilke & Michael Wise, Who Turned Out the Lights? Competition and California’s Power Crisis, 15 ANTITRUST 76, 77-81 (Summer 2001). For a discussion of California’s battle with the federal government to quell the energy crisis, see Rebecca Smith, California Power Grid Faces Duel With U.S., THE WALL STREET JOURNAL, June 4, 2001, at A2.

24 Richard L. Caplan & Stephen M. Hladik, Electric Deregulation in Pennsylvania: An Overview of the Electricity Generation Customer Choice and Competition Act, at 6-7 (1997) (discussing the possibility that deregulation could be a "transition from regulated to unregulated monopol[ies]").

25 Id.26 2 ABA SECTION OF ANTITRUST LAW, ANTITRUST LAW DEVELOPMENTS 1215 (5th ed. 2002) [hereinafter

ANTITRUST LAW DEVELOPMENTS] ("[W]hen a state deregulates an industry, it is not yet clear whether this change in state policy precludes granting immunity under the state action doctrine.") (footnote omitted).

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tion immunity doctrine in light of Pennsylvania’s restructuring efforts. Part I discusses the elec-

tric power industry. Part II defines the components of the electricity industry that have been

"deregulated" by Pennsylvania’s Restructuring Act. Part III introduces and discusses a general

cause of action arising under § 2 of the Sherman Act and a potential "leveraging" cause of action

under § 2. Part IV discusses the doctrine of state action immunity with respect to the regulated

and deregulated aspects of the newly created generation market in Pennsylvania. Part V assesses

the potential liability of incumbent monopolies under a proposed leverage theory analysis. Part

VI assumes a violation of the Sherman Act and evaluates the application of state action immu-

nity from antitrust liability in the competitive generation market.

I. THE ELECTRIC POWER INDUSTRY GENERALLY

Historically, electric utilities operated as vertically integrated,27 natural monopolies28 that

generated their own electricity, transmitted their own electricity, and ultimately distributed that

electricity to consumers for end use. Electricity service was "bundled," a term of art meaning that

each monopoly provided consumers with generation, transmission, and distribution services and

charged consumers for each component.29 As mentioned in the introduction, federal and state

agencies share regulatory authority over the electric power industry,30 an industry that, much like

other industries, consists of retail and wholesale markets.31 As a general matter, state utility 27 Vertical integration in the monopoly sense is basically self sufficiency; that is, the firm adequately

performs services on its own even though the firm could otherwise purchase the same services on the market. HERBERT HOVENKAMP, FEDERAL ANTITRUST POLICY § 9.1, at 369 (2d ed. 1999) (stating several examples—one being where a lawyer washes her own windows instead of hiring someone else to do so). In the traditional electricity industry, companies generated their own electricity, which technically could be purchased from other generators in the market.

28 A monopoly is a single seller that produces all the output of one industry. ERNEST GELLHORN & RICHARD J. PIERCE, JR., REGULATED INDUSTRIES IN A NUTSHELL 34 (2d ed. 1987).

29 Interview with Irwin R. Popowsky, Consumer Advocate of Pennsylvania, in Harrisburg, PA, March 19, 2003. [hereinafter Popowsky Interview]. Mr. Popowsky served as Chair of the National Association of State Utility Consumer Advocates (NASUCA) and has served as Consumer Advocate of Pennsylvania since 1991. He has been regarded as one of the nation’s foremost practitioners and scholars in the area of public utility law, particularly in the electricity industry.

30 ANTITRUST LAW DEVELOPMENTS, supra note 26, at 1295.31 Id. Consider, for example, that retail outlets buy fishing rods in bulk at wholesale prices. The retail outlet

then sells fishing rods to consumers at the retail price (usually, a higher price). The electric power industry, often

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commissions regulate retail electric power markets while the Federal Energy Regulatory

Commission (FERC) regulates interstate wholesale transactions.32

A. The Product of Electricity

Electricity is unique as a "product"33 for several reasons, relative to other products in

other markets.34 First, electricity is invisible and intangible—it neither can be seen nor stored,

although utilities generally keep "reserve capacity" on hand in the event of emergencies such as

power outages and other disruptions of service.35 Second, electricity constantly flows over wires

at all times and operates as a "synchronous, single unit, tying in all segments of the industry."36

Third, supply and demand37 of electricity is simultaneous, and utilities must operate to provide

the exact amount of power that customers need at any given time.38

B. The Process: From Generation to Consumption

Apart from electricity as a product, there are three primary components that make up the

times, is no different. Retail electric companies, commonly known as local distribution companies, can buy electricity from other providers at wholesale prices and resell electricity to consumers at a retail price.

32 FERC derives this power from the Federal Power Act, 16 U.S.C. §§ 791a-828c (2000).33 The term "product" will be used to describe electricity. Although the Sherman Act applies to the electric

industry, the same is not true, perhaps, under the Robinson Patman Act. See City of Groton v. Conn. Power & Light Co., 497 F. Supp. 1040, 1052 (D. Conn. 1980) (holding that electricity is not a "commodity" for purposes of Robinson-Patman Analysis). Cf. City of Kirkwood v. Union Elec. Co., 671 F.2d 1173, 1181-82 (holding that electricity is a commodity under RPA analysis because "[e]lectric power can be felt, if not touched. It is produced, sold, stored in small quantities, transmitted, and distributed in discrete quantities.").

34 "Product" suggest tangibility, a characteristic not associated with electricity. Tangible products, such as books, golf clubs, or fishing rods, come home with the consumer after a purchase transaction. It helps to conceptualize electricity as a product if one thinks of electricity in terms of basic economic principles—buying and selling. True, one can often think of electricity as more of a service than a product, but for purposes of antitrust analysis, particularly under the Sherman Act’s prohibition of illegal monopolization, it is proper to characterize electricity as a "product" rather than mere service, since electricity can be bought, sold, and transferred similarly to other "tangible" products at wholesale and at retail.

35 Janal M. Kalis, The Role of Antitrust Law in Promoting Competition in Electricity Generation and Transmission, 11 J. ENERGY, NAT. RES. & ENV’L. L. 287, 289 (1991).

36 Id.37 Supply focuses on the seller—it is refers to the amount of a product that a seller is willing to sell

according to a schedule of prices. The more the cost of the product to produce, the more the seller is willing to sell. Demand focuses on the consumer—it refers to the amount of a product that a consumer is "willing and able" to purchase according to a schedule of prices. The less the cost of the product, the more the consumer is willing to purchase. For a good discussion of supply and demand, see E. THOMAS SULLIVAN & JEFFREY L. HARRISON, UNDERSTANDING ANTITRUST AND ITS ECONOMIC IMPLICATIONS § 2.02[A], at 11-14 (3d ed. 1998).

38 Kalis, supra note 35, at 289.

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electric industry:39 generation, transmission, and distribution.40 The three components of the

electricity industry operate as one process to deliver electricity to consumers. Generation is the

"production phase" of the process41 and occurs in one of several ways. Electricity can be

generated by hydroelectric power plants, by thermal generators, nuclear plants fueled by

uranium, or by coal-fired plants.42 Each method of generation varies in terms of capital costs,43

safety,44 and environmental impact.45 Transmission is the next step in the process. Transmission

systems, or "grids,"46 carry high voltage electricity from generation facilities over the

transmission system to major load centers, where electric power is toned down. Local

distribution is the last phase of the process. From the load center, electricity flows over power

lines at lower voltages to customers of utilities for end use and consumption.

C. Traditional Regulation of Generation, Local Distribution, and Transmission

Because of its intrastate character, state utility commissions regulated the retail

generation market.47 As natural monopolies, utilities constructed, owned, and maintained their

own generating facilities and recovered what were enormous capital costs48 over time through

rates established by state utility commissions.49 The monopoly generated its own electricity for

39 "Ancillary services," or services incidental to the provision of the first three components, have been classified as a fourth component of utility service. Schwartz, supra note 16, at 1467.

40 Kalis, supra note 35, at 289-90.41 Id.42 Id.43 Id. (stating that hydroelectric generation costs are high because utilities would have to construct dams

and reservoirs).44 Id. at 290 (stating that nuclear plants, for example, are high safety risks in light of Three Mile Island’s

disaster in the seventies).45 Id. (stating the impact on air quality standards for coal burning facilities).46 New York v. Fed. Energy Reg. Comm’n, 122 S.Ct. 1012, 1018 (2002) (discussing the process of the

electric power industry).47 ANTITRUST LAW DEVELOPMENTS, supra note 26, at 1295. See 16 U.S.C. 824(b)(1) (2000) (FERC "shall

not have jurisdiction . . . over facilities used for the generation of electric energy). Note, however, that generation can be an interstate sale, and as such, FERC would have jurisdiction over the sale. Id. (providing that FERC has jurisdiction over the sale of energy at wholesale in interstate commerce).

48 Kalis, supra note 35, at 289-90 (discussing capital costs of generation facilities). 49 See, e.g., 66 PA. CONS. STAT. § 1301 (1999) (requiring that Pennsylvania Public Utility Commission set

rates that are just and reasonable).

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ultimate distribution to consumers or sold its generation to other providers of distribution

services, but such sales were typically limited to proximate utilities, i.e., other utilities within the

state or perhaps to municipalities that operated as electricity service providers.50

Local distribution is also wholly regulated by state utility commissions.51 The local

distribution aspect of the industry has not changed dramatically because monopolies owned and

operated local distribution facilities before deregulation and continue to do so after deregulation.

State utility commission still enjoy wide supervisory and regulatory authority over local

distribution companies in terms of rates52 and service.53

Transmission differs from generation and local distribution because it can be regulated

both by state utility commissions and by FERC. If transmission crosses state lines, FERC has

regulatory authority.54 If transmission is intrastate, state commissions have regulatory power.55

II. PENNSYLVANIA’S RESTRUCTURING ACT

The Electricity Generation Competition and Customer Choice Act changed the traditional

operation of the electricity industry in Pennsylvania by deregulating56 the generation component

of the electricity industry. 57 The Act did not, however, deregulate the intrastate transmission and

50 E.g., Borough of Lansdale v. Phila. Elec. Co., 692 F.2d 307 (3d Cir. 1982) (wholesale municipal customer of regulated utility).

51 ANTITRUST LAW DEVELOPMENTS, supra note 26, at 1295 ("Retail sales of electricity generally are regulated by state public utility commissions.").

52 See, e.g., 66 PA. CONS. STAT. § 1301 (relating to rate regulation of public utilities).53 See, e.g., id. § 1501 (requiring that utilities provide adequate and reasonable service). 54 16 U.S.C. 824(a) (2000). Section 824(b)(1) further provides as follows: "The provisions of this

subchapter shall apply to the transmission of electric energy in interstate commerce and to the sale of electric energy at wholesale in interstate commerce. . . . The Commission shall have jurisdiction over all facilities for such transmission or sale of electric energy[.] Id. § 824(b)(1).

55 Id. Congress otherwise limited federal regulation to "matters which are not subject to regulation by the States." Id. FERC "shall not have jurisdiction . . . over facilities used for the generation of electric energy or over facilities used in local distribution or only for the transmission of electric energy in intrastate commerce[.]" Id.

56 Popowsky Interview, supra note 29. Mr. Popowsky suggested that the use of the term "deregulation" when referring to the Act is perhaps a misnomer. Others share a similar view. See Kate O’Loughlin, The Trigen Case: Does This Mean Lights Out for Energy Deregulation?, 14 LOY. CONSUMER L. REV. 345, 346 (2002) (stating that "deregulation is a misnomer").

57 City of Pittsburgh v. West Penn Power Co., 147 F.3d 256, 263 (3d Cir. 1998) (discussing the change in Pennsylvania’s generation industry as a result of the Restructuring Act).

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local distribution components of the industry.58 Perhaps the fundamental purpose driving the

legislation was a recognition by the General Assembly that competitive prices in generation

would affect the increasingly high and disparate rates throughout the commonwealth in a

positive way for both consumers and utilities.59

A. The New Competitive Generation Market

The transition from regulation of generation to a competitive generation market allows

"retail customers to obtain direct access to a competitive generation market."60 The transition to

competitive generation markets requires that utilities (1) "unbundle" their rates by charging

separate prices for generation, transmission, and distribution61 and (2) "provide open access over

their transmission and distribution systems to allow competitive suppliers to generate and sell

electricity directly to consumers in th[e] Commonwealth."62 The Act further provides that

generation "will no longer be regulated as a public utility service or function except as otherwise

provided for in [the Act]."63 As of January 1, 2001, "incumbent electric distribution companies"

(incumbents), which are natural monopolies, opened up their lines and allowed "electric

generation suppliers" (EGSs or competitors), which are unregulated entities, to enter the market

and offer generation directly to customers at competitive rates.64 The Act placed the "ultimate

choice of the electric generation supplier . . . with the consumer."65

The Pennsylvania Public Utility Commission (PUC) supervised the transition process

primarily by reviewing restructuring plans filed by incumbent utilities.66 All plans filed by the

58 See 66 PA. CONS. STAT. § 2802(16) ("It is in the public interest for the transmission and distribution of electricity to continue to be regulated as a natural monopoly subject to the jurisdiction and active supervision of the commission.").

59 66 PA. CONS. STAT. § 2802(3).60 Id. § 2802(4), (5).61 Id. § 2802(14).62 Id.63 Id. § 2806(a).64 Id.65 Id.66 Id.

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incumbents requested "stranded costs,"67 costs that incumbent utilities otherwise cannot recover

in a competitive market.68 Incumbents also filed proposed unbundled rates for transmission,

generation, and distribution respectively. The restructuring plans also included the incumbent’s

procedures for ensuring open access.69 Nothing in the Act, however, prohibited incumbent

utilities from divesting generation capacity, buying up generation plants, or building new

generation plants specifically for generation services.70

After January 1, 2001, and after the transition process concluded, EGSs could enter the

market, and consumers in Pennsylvania could shop for their generation service.71 Basically, the

incumbent charges a commission-approved, market-based rate (the "price-to-compare" rate) for

generation services.72 Competitors, who now have access to the market, offer a competitive rate

for generation, and customers can choose between the incumbent and its competitors.73

67 Id. § 2802(15). For an excellent discussion of stranded costs, see Ajay Gupta, Tracking Stranded Costs, 21 ENERGY L.J. 113 (2000).

68 Stranded costs are otherwise unrecoverable for several reasons, as one commentator has stated:Sources of potential stranded costs include: (1) investments in generation assets whose market values may have declined below book values; (2) long-term agreements to purchase fuel or deliver electricity at prices that may no longer be competitive; (3) "regulatory assets" that represent previously incurred expenditures whose collection ahs been deferred by regulators; and (4) state-mandated "energy welfare" programs, such as subsidies to renewable energy providers and low income consumers. The state that have embarked on electricity deregulation have had to confront the phenomenon of stranded costs as well as how to allow for their recovery.

Gupta, supra note 67, at 113 (footnote omitted).69 66 PA. CONS. STAT. § 2806(e).70 Popowsky Interview, supra note 29. Unlike California, which required incumbents to divest themselves

of their generation facilities, Pennsylvania "omitted any requirement of divestiture of generation capacity." See Harvey, supra note 22, at 43. Thus, incumbent utilities could maintain their generation facilities, sell their facilities to competitors, or construct new facilities.

71 66 PA. CONS. STAT. § 2806(a).72 Popowsky Interview, supra note 29.73 PA. OFFICE OF CONSUMER ADVOCATE, ELECTRIC SHOPPING GUIDE (March 2003) [hereinafter ELECTRIC

SHOPPING GUIDE]. The Pennsylvania Office of Consumer Advocate publishes the electric shopping guide monthly. The guide sets for the incumbent utility’s generation rates and lists the rates of alternative providers in the incumbent’s service area (the competitors). Shoppers can select their generation provider based on rates and type of energy, which includes green and renewable energy. Interestingly, the competitive rate is generally higher than the incumbent’s rate, and as a result, competitors often offer these other incentives to consumers to purchase generation from competitors rather than the incumbent, such as the provision of renewable energy or green power. This is quite interesting given the policy behind competition: implement competition and rates will be lower. Paradoxically, the incumbent’s rate is difficult to compete with, and the competitor’s rates are generally not lower than the incumbents. Perhaps this is why only ten percent of Pennsylvania electric consumers shop. Popowsky Interview, supra note 29.

Additionally, many competitors initially entered the deregulated generation market in Pennsylvania, but there has been a decline in the amount of competitive suppliers since the passage of the Restructuring Act. See, e.g.,

10

B. Ongoing Regulation Despite the Restructuring Act

Competition in the generation market notwithstanding, the Restructuring Act did not

deregulate the transmission or distribution components of the industry. The Act states that the

public interest will be best served if "transmission and distribution. . . continue to be regulated as

a natural monopoly subject to the jurisdiction and active supervision of the commission."74

Second, although the Act does not explicitly state whether competition in the generation

market is absolute—absolute in the sense that the state’s interest in promoting competition will

trump the interest of maintaining reliable and uninterrupted service—it appears that the PUC’s

regulatory authority is a fallback in the event competition proves detrimental to the public

interest.75 It seems clear that the PUC must continue to guarantee reliable, uninterrupted service

and must continue to prevent mass outages throughout the state caused by system failure even in

a competitive market.76

Third, the PUC has regulatory authority over market participants. The PUC engaged in

rulemaking proceedings and promulgated a "Code of Conduct" that governs the activities of

incumbent utilities and competitors.77 The stated purposes are (1) to ensure open access on

Peter DeFazio, The False Promise of Electricity Deregulation, 3 OREGON’S FUTURE 27, 29 (2002) (stating that the "number of ‘competitors’ in Pennsylvania has declined from 25 to 6"). Currently, however, there appears to be at least eight licensed competitors operating in Pennsylvania. Some of the licensed competitors are Community Energy, Green Mountain Energy Company, Dominion Peoples Plus, ACN Energy, Inc., electricAMERICA, Mack Services, PowerChoice, and Energy Cooperative Association of Pennsylvania. See ELECTRIC SHOPPING GUIDE, supra.

74 66 PA. CONS. STAT. § 2802(16).75 Id. § 2804(1), (3), (10). For instance, the Act imposed commission-approved rate caps on incumbents. Id.

§ 2804(1)(4). The Act further placed the burden on incumbent utilities to maintain the integrity of the distribution system to assure safe and reliable service to customers. Id. § 2807(a). The Act placed certain billing restrictions on the incumbents. Id. § 2807(d). The Act also gave the PUC power to monitor possible anticompetitive conduct associated with the exercise of market power and the effects of proposed mergers and acquisitions. Id. § 2811(a)-(f). See also, e.g., ARIPPA v. Pa. Pub. Util. Comm’n, 792 A.2d 636 (Pa. Commw. Ct. 2002) (discussing provisions of the Act’s merger regulation, court held that the PUC’s approval of merger was in the public interest and not anticompetitive); Indianapolis Power & Light Co. v. Pa. Pub. Util. Comm’n, 711 A.2d 1071 (Pa. Commw. Ct. 1998) (discussing interplay between Customer Choice Act’s allowance of utility’s stranded transition costs and holding that such provisions do not violate Commerce Clause).

76 See, e.g., 66 PA. CONS. STAT. § 2802(12) (reliability of electricity is necessary in the public interest).77 See Re Pennsylvania Electric Industry, Docket No. L-98013, 1998 WL 191235 (Pa. P.U.C. Feb. 13,

1998); Re Competitive Safeguards for the Pennsylvania Electric Industry, Docket No. L-00980322, 2000 WL 749719 (Pa. P.U.C. April 28, 2000). See 52 PA. CODE §§ 54.121, 54.122 (2002) (codification of rulemakings).

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nondiscriminatory terms, (2) to ensure nondiscriminatory rates, (3) to prevent incumbents and

competitors from engaging in unfair or deceptive practices, and (4) to "establish and maintain an

effective and vibrant competitive [generation] market . . . in th[e] Commonwealth."78

C. Antitrust Activity in Light of Pennsylvania’s Restructuring

The competitive market created by the Restructuring Act has not, as of yet, been the

subject of any significant antitrust litigation. In two cases, Schuylkill Energy Resources, Inc. v.

Pennsylvania Power & Light Co.79 and City of Pittsburgh v. West Penn Power Co.,80 competitors

of incumbents alleged that certain practices gave rise to antitrust violations. Discussing antitrust

violations in light of Pennsylvania’s Restructuring Act, the Third Circuit held that the alleged

anticompetitive practices by the incumbent were still proper under the regulatory scheme, and

any inhibition on the competitors ability to compete in the future under the Restructuring Act

was too speculative to consist of any real antitrust injury, since the Restructuring Act had not

taken full effect.81 In another case, the Third Circuit applied the standard for "antitrust standing"82

and concluded that city-customers of two merging electric utilities did not show antitrust injury.83

78 52 PA. CODE § 54.121. The Code of Conduct flushes out these general purposes and prohibits incumbents from granting preferential treatment to other competitors, whether affiliates of the incumbent or not, in supplying service, customer information, operational status of the distribution system, and availability of supply. Id. § 54.122(1), (2), (6). In addition, the Code of Conduct prevents tying arrangements. Id. § 54.122(5)(i), (ii) (incumbents "may not illegally tie the provision of any electric distribution service within [Pennsylvania] to one of the following: (i) [t]he purchase, lease or use of any other goods or services offered by [the incumbent] or its affiliates [or] (ii) [a] direct or indirect commitment not to deal with any competing electric generation supplier."). The Code of Conduct also prohibits unfair or deceptive practices such as inferring in any way that generation sold by the incumbent rather than a non-affiliate competitor is superior simply because of affiliation with the incumbent. Id. § 54.122(10).

79 113 F.3d 405 (3d Cir. 1997).80 147 F.3d 256 (3d Cir. 1998).81 Schuylkill Energy, 113 F.3d at 416. 82 To show "antitrust standing," the court considers numerous factors, including whether the alleged

antitrust violation caused a direct, not speculative, "antitrust injury" to the plaintiff. For a Supreme Court case that discusses antitrust standing, see Associated General Contractors of California v. California State Council of Carpenters, 459 U.S. 519, 539-45 (1983).

83 West Penn Power, 147 F.3d at 265. Notably, the court stated that the comprehensive regulatory framework significantly restricts the nature of the competition which is permitted. While it is true that the regulatory landscape of the electric power industry is in the process of changing, even the Competition Act does not anticipate a completely "free market" for electric services. Rather, the changes will result in a form of regulated competition.

Id. at 264-65.

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With the exception of these cases, there has been no discussion of the impact that the

Restructuring Act could have on antitrust analysis.84

III. SHERMAN ACT LIABILITY GENERALLY

As mentioned in the introduction, the Sherman Act historically had little impact on the

regulated electricity industry because the industry was comprised of legal monopolies.85 Coupled

with the protection afforded by state action immunity under this regulatory scheme,86 antitrust

actions against electric utilities were indeed rare.87 As a preliminary matter, however, consider

the statement of one Supreme Court Justice when discussing the Sherman Act: "Because the

Sherman Act is couched in broad terms, it is adaptable to the changing types of commercial

production and distribution that have evolved since its passage."88 This is particularly significant

in the electric power industry, which has undergone significant structural changes over the past

twenty years, the deregulation of the generation market at the state level being most prominent.89

As industries change, however, the purposes of the antimonopoly provisions of the Sher-

man Act90 remain constant. The Sherman Act is a mechanism of public protection with twin

84 Although City of Pittsburgh and Schuylkill Energy both discussed the possibility of antitrust liability in the competitive generation market created by Pennsylvania’s Restructuring Act, both causes of action arose before the Act took effect in 2001. Nonetheless, it is now 2003, and there has been no antitrust litigation involving utilities operating in Pennsylvania’s deregulated generation market.

85 Bolze et al., supra note 6, at 80. The Sherman Act prohibits illegal monopolization.86 Infra Part IV.87 Bolze et al., supra note 6, at 79 (antitrust "played a small role in the evolution of the energy industry").88 See United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 386 (1956).89 This is not to say that antitrust analysis in the interstate wholesale market is irrelevant or that the

interstate wholesale market has not undergone significant changes. To the contrary, since the interstate wholesale market is a market that is, in relation to Pennsylvania’s generation market, much more competitive, one might say that antitrust analysis is equally relevant in the interstate wholesale market. Popowsky Interview, supra note 29. It seems, however, that antitrust analysis in the local transmission and distribution markets will not be as relevant because both markets remain tightly regulated. Whatever the case, this article focuses on Sherman Act violations involving a deregulated generation market such as Pennsylvania’s.

90 15 U.S.C. §§ 1-11 (2000). Compare 15 U.S.C. § 1 (forbidding concerted action in restraint of trade). Although outside the scope of this discussion, there are two tests that uncover § 1 violations: (1) the "per se" test and (2) the "rule of reason" test. Eichorn v. AT&T Corp., 248 F.3d 131, 138 (3d Cir. 2001). Under the former, defendants violate § 1 for blatant anticompetitive conduct. Id. Contrastingly, the latter test requires the court to review all circumstances with particular focus on the practices of the industry involved. Id.

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aims: protect competition in the market and prevent monopolization.91 Since not all types of

competitive behavior fall under the prohibitions of the Sherman Act, the focus shifts to behavior

that "unfairly tends to destroy competition."92 It is the nexus between the monopoly and the com-

petitive market that the antitrust laws seek to monitor.93

The antimonopoly provisions of the Sherman Act provide that "[e]very person who shall

monopolize . . . or combine or conspire with any other person or persons, to monopolize any part

of the trade or commerce among the several States . . . shall be deemed guilty of a felony[.]"94

The elements necessary to show illegal monopolization under § 2 are twofold: (1) monopoly

power in the relevant market and (2) willful acquisition or maintenance of monopoly power.95

A. Monopoly Power in the Relevant Market

The first element necessary to show illegal monopolization is actually comprised of two

sub-inquiries: the court must determine the relevant market and then assess the firm’s market

91 Standard Oil Co. v. Fed. Trade Comm’n, 340 U.S. 231, 248 (1951). There is much debate and literature associated with the true purpose of antitrust legislation. HERBERT HOVENKAMP, FEDERAL ANTITRUST POLICY § 2.1, at 48 (2d ed. 1999). That Congress intended to preserve competitive markets perhaps remains the paramount consideration. Standard Oil, 340 U.S. at 248; HOVENKAMP, supra, § 2.1, at 47; SULLIVAN & HARRISON, supra note 37, § 1.01, at 1-7. Commentators have suggested that other forces fueled antitrust legislation—economic efficiency, consumer protection, protection of small businesses, and arguably, protection of competitors. HOVENKAMP, supra, § 2.1, at 48 (good overview of the differing schools of thought). This article proceeds on the general assertion that the antitrust laws seek to preserve competition.

92 Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 458 (1993). The policy outlined in the Spectrum opinion was incorporated in the Court’s discussion of the attempted monopoly prohibition of § 2 but nonetheless applies to the Sherman Act as a whole. Id.

93 The interplay between the "restraint of trade" provision in § 1 and the antimonopoly provision in § 2 was discussed in a Standard Oil Co. v. United States, 221 U.S. 1, 61 (1911), where the court stated that § 2 was enacted to reach behavior outside of § 1, but the goal of preventing activity "in restraint of trade" was equally the goal of § 2.

94 15 U.S.C. § 2 (2000). The Sherman Act also prohibits attempted monopolization. 15 U.S.C. § 2 (2000) ("[e]very person who shall . . . attempt to monopolize . . . shall be guilty of a felony"). The Supreme Court in Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447 (1993), set forth the legal standard for attempted monopolization under § 2 of the Sherman Act. To sustain a claim against a firm for attempted monopolization, plaintiffs must show that (1) the firm has engaged in anticompetitive conduct with (2) specific intent to monopolize, (3) such that there is a "dangerous probability" that the firm will acquire monopoly power. Id. at 456; Cogeneration Corp. v. Orange & Rockland Utils., Inc., 159 F.3d 129, 141 (3d Cir. 1998); Schuylkill Energy Res. v. Pa. Power & Light Co., 113 F.3d 405, 415 (3d Cir. 1997). The Court further stated that a "dangerous probability" of monopolization is not only determined by the alleged monopolist’s intent to monopolize but by a careful examination of the relevant market and the firm’s ability to impact competition in that market. Spectrum Sports, 506 U.S. at 456. For a discussion of a Third Circuit opinion on an attempted monopolization claim, see Barr Laboratories, Inc. v. Abbott Laboratories, 978 F.2d 98, 114 (3d Cir. 1992) (no attempted monopolization where defendant firm’s market share was 50%, new competitors and new products entered the market, and prices remained stable)

95 United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966).

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power in that market.96 As this analysis suggests, the relevant market inquiry simply provides the

context within which a firm’s market power must be analyzed, because market power alone is

not a violation of the Sherman Act.97

The relevant market is defined by the "cross-elasticity of demand."98 Courts and econo-

mists use this term to gauge consumer reactions to market conditions.99 Products in a given area

that can be substituted for one-another should be included in the relevant market because con-

sumers can turn to different products that serve virtually the same purpose when the price of an-

other similar product goes up.100 Courts further inquire into the relevant "product" market and the

relevant "geographic" market.101 The former refers to a group of products that consumers will

turn to if a monopolists raises its prices for similar products.102 The latter refers to a region where

96 Monopoly power is simply a "large amount of market power." HOVENKAMP, supra note 91, § 6.2, at 269.97 United States v. Microsoft Corp., 253 F.3d 34, 50 (D.C. Cir. 2001). 98 United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 380 (1956). Determination of the relevant

market in § 1 claims is similar. See Nat’l Coll. Athletic Ass’n v. Bd. of Regents, 468 U.S. 85, 111 (1984) (stating that the test is "whether there are other products that are reasonably suitable for televised NCAA football games").

99 To illustrate, where the price of one product in a given geographic area increases, and the price of another, similar product stays constant, demand for the similar, less expensive product should increase. Where that scenario exists, it is more likely that both products will be included in the relevant market. U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N, HORIZONTAL MERGER GUIDELINES § 1.01 (1992) [hereinafter MERGER GUIDELINES].

100 E.I. du Pont, 351 U.S. at 395. Courts and commentators often use the term "reasonable interchangeability" when discussing the relevant market. Thus, the "relevant market" includes all products that are "reasonably interchangeable" by consumers. "Reasonable interchangeability" encompasses such factors as the price of the products involved. E.g., Int’l Boxing Club of New York v. United States, 358 U.S. 242 (1959) (championship matches more expensive than non-championship matches infers lesser degree of "interchangeability"). But see SmithKline Corp., v. Eli Lilly & Co., 575 F.2d 1056, 1063 (3d Cir. 1978) (stating that since doctors "do not opt for a less expensive over a more costly medication[,]" price did not factor in to customer choice and thus not relevant in market definition).? Other factors include the use to which products are put, e.g., Columbia Metal Culvert Co., Inc. v. Kaiser Aluminum & Chem. Corp. 579 F.2d 20 (3d Cir. 1978) (aluminum culvert used in salt-water regions because less corrosive than steel implied that steel and aluminum were not interchangeable), the quality of the products, e.g., Int’l Boxing, 358 U.S. at 250 (higher quality, championship boxing included in the relevant market; non-championship boxing excluded); SmithKline Corp. v. Eli Lilly & Co., 575 F.2d 1056, 1063 (3d Cir. 1978) (antibiotic with less harmful side-effects included in the relevant market; alternative antibiotic with harmful side-effects excluded), and to some extent, the preference of one product over another. E.g., United States v. Grinnell Corp., 384 U.S. 563 (1966) (accredited services preferred by customers included in the relevant market; non-accredited services excluded). The more similar the products, therefore, the more likely the products are "interchangeable."

101 E.g., Grinnell Corp., 384 U.S. at 571, 575 (central service stations as product market; United States as geographic market).

102 MERGER GUIDELINES, supra note 99, § 1.11. If the firm increases its price for that product, but no profit results because alternative products provide a reasonable substitute for consumers, then the product market would be too narrow, and the "next best substitute" product would be included in the relevant product market. Suppose Monopolist A, for example, is selling product B at $100 and subsequently raises its prices for B to $150. Instead of

15

the relevant product can be acquired if a monopolist increases its prices for the relevant product

in another region where such product is sold.103

Once the relevant market is defined, antitrust courts must determine whether the firm in

question possessed market power within that market, and the predominate indicator is the firm’s

market share in the defined relevant.104 Although the existence of market power is a fact-inten-

sive analysis,105 courts have held that an alleged monopolist must possess at least fifty percent of

the market share in the relevant market before an inference of market power arises.106 Some

courts require more.107 Perhaps because this "sliding scale" measure of market power has trou-

bled courts and commentators,108 economists, courts, and agencies charged with enforcing an-

buying B at $150, consumers react by buying C at $100, and sales for B at $150 prove unprofitable. The "product" market would therefore include products B and C. Monopolist A would not be exercising market power over that product because A failed to increase prices "profitably," and Monopolist A would not be exercising monopoly power over that product because A could not "exclude competition."

103 MERGER GUIDELINES, supra note 99, § 1.21. If consumers respond to a price increase in the relevant product in a given region by shifting to similar products outside the region, then the relevant geographic market would include the region that would be the "next best substitute." Suppose Monopolist A is selling product B at $100 in Anyplace, USA and subsequently raises its prices for B to $150. Consumers react by buying C in Anywhere, USA for $100, and sales for B prove unprofitable. The relevant "geographic" market would thus include both Anyplace, USA and Anywhere, USA.

104 The economic definition of "market share" is "the output of a supplier divided by the total market output." STEVEN STOFT, POWER SYSTEM ECONOMICS 341 (2002). The effect of a significant market share logically follows from this definition: "The larger the share of a competitor, the greater its markup over marginal cost." Id. The Department of Justice and the Federal Trade Commission calculate market shares

based on the total sales or capacity currently devoted to the relevant market together with that which likely would be devoted to the relevant market in response to a "small but significant and nontransitory" price increase. Market shares can be expressed either in dollar terms through measurement of sales, shipments, production, or in physical terms through measurement of sales, shipments, production, capacity, or reserves.

MERGER GUIDELINES, supra note 99, § 1.41.105 Borough of Lansdale v. Phila. Elec. Co., 692 F.2d 307, 311 (3d Cir. 1982).106 See, e.g., Valley Liquors v. Renfield Importers, 822 F.2d 565 (7th Cir. 1987) (as a matter of law, firm

cannot illegally monopolize without possessing 50% of the relevant market).107 E.g., Grinnell Corp., 384 U.S. at 571, 571 (87%). Cf. United States v. Aluminum Co. of America, 148

F.2d 416, 424 (5th Cir. 1945) ("[I]t is doubtful whether sixty or sixty-four percent [share of the market] would be enough; and certainly thirty-three per cent is not.").

108 Some commentators reject the proposition that a "sliding scale" of market power should dictate, by itself, whether a firm possesses market power. HOVENKAMP, supra note 91, § 6.2a, at 270-71. Nonetheless, market share seems to be a prominent factor. The Supreme Court has upheld a finding of market power where a manufacturer of complex business machines possessed one hundred percent of the product market and eighty to ninety percent of the corollary service market. Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451 (1992). See also American Tobacco Co. v. United States, 328 U.S. 781, 797 (1946) (power over two thirds of the entire cigarette industry and eighty percent control over all comparable cigarettes in the relevant market). Similarly, an electric power company possessing ninety-one percent of the retail electricity market constituted monopoly power. Otter Tail Power Co. v. United States, 410 U.S. 366 (1973). A boxing promoter possessing eighty-one

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titrust laws use several standards to define market power. Three standards emerge, one of which

is an "economic standard," one of which is a "legal standard," and one of which is a "hybrid stan-

dard." First, the economic definition of market power is simply the "ability to profit by moving

the market price away from the competitive level."109 The legal definition is the ability to exer-

cise control over prices and exclude competition with respect to a given product in the relevant

market.110 The "hybrid standard" has been developed by the DOJ and the FTC: "the ability prof-

itably to maintain prices above competitive levels for a significant period of time."111 This defini-

tion excludes conduct otherwise falling within the reach of the economic definition.112

B. Willful Acquisition or Maintenance of Monopoly Power

The second element of § 2 analysis is the conduct requirement, although the legal

standard is widely stated as the "willful acquisition or maintenance of monopoly power."113

Intertwined within this prong of § 2 analysis are two inquiries: an "intent" inquiry and a

"conduct" inquiry.114 This can be inferred from the Supreme Court’s interpolation of the "willful"

prong of § 2 analysis. The Court has stated that this prong is satisfied when a firm uses its

monopoly power "‘to foreclose competition, to gain a competitive advantage, or to destroy a

competitor.’"115 As such, it appears that courts consider a firm’s "intent" to illegally monopolize

percent of the championship boxing market possessed monopoly power. Int’l Boxing Club of New York v. United States, 358 U.S. 242 (1959). A manufacturer of cellophane possessing only twenty percent of "flexible wrapping products," however, did not possess monopoly power. United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377 (1956). The Third Circuit has followed suit, requiring at least a fifty-five percent share of the market: "As a matter of law, absent other relevant factors, a 55 percent market share will not prove the existence of monopoly power." Fineman v. Armstrong World Indus., 980 F.2d 171, 201 (3d Cir. 1992). See also SmithKline Corp. v. Eli Lilly & Co., 575 F.2d 1056 (3d Cir. 1978) (100% to 89% market share); Columbia Metal Culvert Co., Inc. v. Kaiser Aluminum & Chem. Corp. 579 F.2d 20, 30 (3d Cir. 1978) (80% market share); cf. Ideal Dairy Farms, Inc. v. Labatt, Ltd., 90 F.3d 737, 749 (3d Cir. 1997) (47% not enough).

109 STOFT, supra note 104, at 317.110 E.I. du Pont, 351 U.S. at 391; Borough of Lansdale, 692 F.2d at 311 (monopoly power requires a finding

of both price control and exclusion of competition).111 MERGER GUIDELINES, supra note 99, § 0.1.112 STOFT, supra note 104, at 366.113 United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966).114 HOVENKAMP, supra note 91, § 6.3, at 272-74.115 Eastman Kodak, 504 U.S. at 482-83 (1992) (citing Aspen Skiing Co. v. Aspen Highlands Skiing Corp.,

472 U.S. 585, 605 (1985)).

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and the "exclusionary" conduct the firm uses to acquire or maintain its monopoly status.

The intent aspect arguably involves a subjective and objective inquiry.116 The debate is

ongoing, but for purposes of this article, the objective inquiry is perhaps the better inquiry. The

objective analysis often looks to exclusionary conduct that a firm engages in to acquire or

maintain monopoly power.117 The key distinction is the distinction between "predatory"

behavior,118 which implies that the firm is engaging in illegal behavior, and "honestly

competitive" behavior, which implies that the firm is engaging in the "rough and tumble" of

competition without crossing the boundaries of the Sherman Act.119

C. Leverage Theory of Liability

Leverage theory, although not without its controversial status,120 is nonetheless a theory

of antitrust liability that seems quite relevant in the newly created generation market.121 Under a

leverage theory, a firm can be liable under § 2 of the Sherman Act for using its monopoly power

in one market to gain an advantage in a second market.122 The theory can be read one of three

116 HOVENKAMP, supra note 91, § 6.4c, at 278 ("Evidence of intent comes in two kinds, objective and subjective. Objective evidence of intent is evidence inferred from the defendant’s conduct. Subjective evidence of intent is evidence such as statements that indicate that the defendant consciously had a certain end in mind.").

117 Id. See also, e.g., Aspen Skiing, 472 U.S. at 602 (stating that "the question is whether the challenged conduct is fairly characterized as ‘exclusionary’ or ‘anticompetitive’—to use the words in the trial court’s instructions—or ‘predatory,’ to use a word that scholars seem to favor. Whichever label is used, there is agreement on the proposition that ‘no monopolist monopolizes unconscious of what he is doing.’"). Robert Bork’s famous statement suggests that improper exclusionary practices are themselves evidence of intent. See ROBERT H. BORK, THE ANTITRUST PARADOX 160 (1978) ("Improper exclusion (exclusion not the result of superior efficiency) is always deliberately intended.").

118 Aspen Skiing, 472 U.S. at 602.119 Northeastern Tel. Co. v. AT&T, 651 F.2d 76 (2d Cir. 1981) ("[D]ominant firms, having lawfully

acquired monopoly power, must be allowed to engage in the rough and tumble of competition.").120 E.g., HOVENKAMP, supra note 91, § 7.9, at 317 (using the headnote, "The Troublesome ‘Leverage’

Theory" to introduce discussion regarding leverage theory); Bolze et al., supra note 6, at 108 (outlining the split of authority regarding the proper standard to apply under a leverage theory).

121 ANTITRUST LAW DEVELOPMENTS, supra note 26, at 1301 ("Claims have been raised on occasion against electrical utilities challenging a utility’s use of its market power in the regulated market to monopolize or attempt to monopolize a second, unregulated market.").

Commentators suggest that, in the interstate transmission market, FERC regulations should prevent leveraging because FERC requires all owners of transmission facilities to make their lines available to competitors. Bolze et al., supra note 6, at 108.

122 United States v. Griffith, 334 U.S. 100, 107-09 (1948). The principle dates back to the 1940s and "has remained ambiguous ever since." HOVENKAMP, supra note 91, § 7.9, at 317. Leveraging most closely resembles an illegal "tying" arrangement, a § 1 violation. Allen-Myland, Inc. v. Int’l Bus. Mach. Corp., 33 F.3d 194, 201 (3d Cir.

18

ways: (1) The leveraging firm will only be liable if, by using its monopoly power in one market,

it actually monopolizes a second market;123 (2) the leveraging firm will only be liable if, by using

its monopoly power in one market, it attempts to monopolize a second market;124 (3) the

leveraging firm will only be liable if, by using its monopoly power in one market, it gains an

advantage in a second market.125

The facts of Cantor v. Detroit Edison Co.126 represent a leveraging scenario, although the

case is known as a state action immunity case. In Cantor, the monopoly utility offered free light

bulbs to its customers as part its service, a service approved by the state utility commission.127

The free light bulb service affected at least one private light bulb dealer, who claimed that the

utility, by using its monopoly power, had a competitive advantage over private light bulb

dealers.128 The court ultimately held that the utility was not shielded by state action immunity.129

The value of Cantor as a state action immunity case is questionable, but the factual setting that

Cantor illustrates is a valuable representation of a potential leveraging scenario involving a

regulated monopoly exercising its power in a unregulated or perhaps deregulated market.130

IV. STATE ACTION IMMUNITY GENERALLY

State action immunity, if applicable, would completely exempt any utility operating in

1994). Generally, a "tying" arrangement occurs where a firm sells one product ("tying product") on the condition that the buyer purchase another product ("tied product"). Id. The violation occurs where the seller can force buyers to purchase the "tied product." Id.

123 See, e.g., Alaska Airlines, Inc. v. United Airlines, Inc., 948 F.2d 536 (9th Cir. 1991). This would be a very narrow reading, most favorable to the alleged leveraging firm.

124 Berkey Photo v. Eastman Kodak Co., 603 F.2d 263, 267 (2d Cir. 1979). This seems to be the current standard and is the moderate approach.

125 This would be the broadest reading of Berkey, most favorable, perhaps, to competitors. It does not appear that any court or commentator has adopted such a broad reading, although such an interpretation is possible.

126 428 U.S. 579 (1976).127 Id. at 583.128 Id. at 582-83.129 Id. at 598. 130 See also, e.g., Yeager’s Fuel, Inc. v. Pa. Power & Light Co., 22 F.3d 1260 (3d Cir. 1994) (market power

in regulated electricity market; secondary, unregulated market was "home heating systems"); Aquatherm Indus., Inc. v. Fl. Power & Light Co., 145 F.3d 1258 (11th Cir. 1998) (market power in regulated electricity market; secondary, unregulated market was heating systems for swimming pools).

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the generation market that faced Sherman Act violations.131 The principle of immunity developed

from concepts of dual sovereignty and federalism.132 On one side, preemption teaches that federal

antitrust laws supercede conflicting local law that permits anticompetitive behavior.133 On the

other, concepts of state autonomy suggest that, for example, the state’s police powers will be

undermined if federal antitrust law preempts regulatory schemes imposed by states to ensure the

health, safety, and welfare of its citizens.134 As the courts have interpreted the text and legislative

history of the antitrust laws throughout the years, the latter view has prevailed. As a general

matter, although states may not direct a firm to violate antitrust laws,135 federalism requires that

the state have some autonomy in displacing federal antitrust laws with its regulatory plans.136

This idea developed in the landmark case of Parker v. Brown,137 where the Supreme Court held

that state officials could not be liable under antitrust laws for implementing a state statute that

had anticompetitive effects.138

Parker immunity ebbed and flowed with various cases in the years that followed,139 but

131 See supra note 8.132 See generally Parker v. Brown, 317 U.S. 341 (1943) ("In a dual system of government in which, under

the Constitution, the states are sovereign save only as Congress may constitutionally subtract from their authority, an unexpressed purpose to nullify a state’s control over its officers and agents is not lightly to be attributed to Congress."). AREEDA & HOVENKAMP, supra note 8, ¶ 226a, at 464 (discussing federalism principles and the "active supervision" requirement of Parker); HOVENKAMP, supra note 91, § 20.2, at 724 (discussing federalism and the history of state action immunity).

133 U.S. CONST. art. VI, § 2. Fully acknowledging the risk of oversimplification, preemption generally involves some conflict between federal and state law. Congress can expressly preempt state law by so declaring in legislation. Preemption can also be implied if Congress, without indicating express preemption, regulates an entire industry or where, again without indication of express preemption, state and federal law actually conflict. See, e.g., La. Pub. Serv. Comm’n v. Fed. Communications Comm’n, 476 U.S. 355, 368-69 (1986). For a brief discussion of the preemption doctrine, see Michael G. Nast, Medical Device Preemption—A Plaintiff’s Perspective, 12 WIDENER L.J. 87, 87-89 (2003) (brief overview of preemption generally). There is also some suggestion that preemption is the first step in any state action immunity analysis; i.e., if state law is preempted, there is no need to further inquire whether state action immunity applies. AREEDA & HOVENKAMP, supra note 8, ¶ 221, at 355; HOVENKAMP, supra note 91, § 20.1, at 723. This discussion will not be pursued in this article. Preemption is introduced here simply for illustrative purposes and to inform the reader that a preemption analysis might play a role before reaching the question of state action immunity.

134 See, e.g., HOVENKAMP, supra note 91, § 20.1, at 723-24.135 Parker, 317 U.S. at 351-52. That is to say, the state cannot tell firms to violate the antitrust laws.136 Id. See also generally AREEDA & HOVENKAMP, supra note 8, ¶ 226a, at 464.137 317 U.S. 341 (1943).138 Id. at 345.

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the standard to calculate a firm’s immunity under a state action theory was more or less settled in

California Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc.140 Whether immunity will

attach to alleged anticompetitive conduct under the Midcal test generally turns on two principles.

First, the state must "clearly articulate" and "affirmatively express" a state policy to displace

competition with regulation.141 Second, the "state itself" must actively supervise the firm to

assure that the authorized conduct furthers state policy.142

A. Clear Articulation: The State Itself and Clarity of State Policy

The articulation requirement of the state action immunity doctrine requires that the "state

itself" clearly express its intent to displace competition with regulation.143 The principle of dual

sovereignty is instructive here. That the state itself must articulate its policy displacing

competition with regulation forecloses the possibility that local governments—cities, boroughs,

townships, and the like—can articulate a policy and essentially authorize conduct that falls

within antitrust laws.144 As such, the "articulating" body must be one of the three branches of the

state’s government: the executive,145 the judicial,146 or the legislative.147 The usual case, of course,

involves the legislative branch articulating a state policy displacing competition with regulation

139 See, e.g., Southern Motor Carriers Rate Conference, Inc. v. United States, 471 U.S. 48 (1985) (reversing prior holdings that the state must compel anticompetitive behavior). See, e.g., Community Communications Co. v. Boulder, 455 U.S. 40 (1982); City of Lafayette v. La. Power & Light Co., 435 U.S. 389 (1978) (cases discussing Parker immunity in terms of local municipalities).

140 445 U.S. 97 (1981).141 Id. at 106.142 Id.143 Id. See also AREEDA & HOVENKAMP, supra note 8, ¶ 226a, at 464.144 See e.g., Community Communications Co. v. City of Boulder, 455 U.S. 40 (1982); see City of Lafayette

v. La. Power & Light Co., 435 U.S. 398, 412 (1978 (plurality opinion) (stating that "[c]ities are not themselves sovereign"). Under the Local Government Antitrust Act of 1984, local governments are not liable for antitrust damages, although plaintiffs may continue to sue local governments under antitrust laws and seek injunctive relief. See 15 U.S.C. §§ 34-36 (2000).

145 E.g., Hoover v. Ronwin, 466 U.S. 558, 568 n.17 (1984).146 E.g., Bates v. State Bar of Az., 433 U.S. 350 (1977); Goldfarb v. Va. State Bar, 421 U.S. 773 (1975).147 Hovenkamp suggests that the "state itself" can be an agency if (1) the agency has quasi-legislative

powers, (2) members of the agency are financially disinterested in the regulated industry, and (3) the agency as a whole is specifically accountable to one of the three branches of government. HOVENKAMP, supra note 91, § 20.4, at 730.

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because virtually all regulatory schemes develop by legislative act.148

The articulation element also requires that the state’s policy to displace competition with

regulation is sufficiently expressed. Courts and commentators attempt to define this sufficiency,

often times, by stating what is insufficient. Where a state’s policy towards the alleged

anticompetitive behavior is "neutral" tends to indicate that the state has not clearly stated its

purpose to displace competition with regulation.149 The prominent standard seems to be a

foreseeability test: whether the state could clearly foresee the anticompetitive conduct in question

given its stated policy of displacing competition with regulation.150

B. Active Supervision by the State151

The active supervision requirement assures that the state "exercise[s] sufficient

independent judgment and control so that the details of the [regulation] have been established as

a product of deliberate state intervention."152 This requirement, however, raises two questions:

First, may the state delegate its supervision responsibilities? Second, assuming that the state can

delegate, how much supervision is required?

Pragmatically speaking, the state itself, particularly in the utility context, rarely does the

supervising directly. Instead, that duty falls squarely with the state utility commissions.153 The

difficulty is gauging the level of supervision that satisfies Midcal’s active supervision prong,

148 See, e.g., Southern Motor Carriers Rate Conference, Inc. v. United States, 471 U.S. 48, 62-63 (1985) (limiting Parker immunity to the usual scenario where a state legislature approves a state policy of anticompetitive conduct to further a regulatory scheme).

149 Community Communications Co. v. Boulder, 455 U.S. 40, 55 (1982)150 City of Columbia v. Omni Outdoor Adver., Inc., 499 U.S. 365, 373 (1991); Town of Hallie v. City of

Eau Claire, 471 U.S. 34, 40 (1985). Notice that the conduct in question must be foreseeable, not merely anticompetitive conduct in general. See also generally Trigen-Oklahoma City Energy Corp. v. Oklahoma Gas & Electric Co., 244 F.3d 1220 (10th Cir. 2001) (state must foresee the anticompetitive conduct in question); HOVENKAMP, supra note 91, § 20.4, at 730; SULLIVAN & HARRISON, supra note 37, § 3.07[A], at 93.

151 This element need not be addressed unless the defendant is a private party. Indeed, it would make little sense to require that the state actively supervise itself. Hallie, 471 U.S. at 47.

152 Fed. Trade Comm’n v. Ticor Title Ins. Co. 504 U.S. 621, 634-35. (1992).153 Hovenkamp suggests that "the level of government imposing the regulation is also the one that should do

the supervising." HOVENKAMP, supra note 91, § 20.5c, at 736.

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since the level of supervision in any given industry varies.154 As courts and commentators

suggest, whether the state is actively supervising vicariously through its agencies depends on

whether the agency has supervisory power and the agency exercises that power.155

C. Effect of Electric Utility Cases on the Doctrine of State Action Immunity

The cases where state action immunity is raised by electric utilities facing antitrust

violations have not significantly altered the general Midcal analysis,156 although some variations

on the elements of Midcal tend to appear. Some cases suggest, for example, that neutral policies

monitored by branches of state utility commissions can satisfy Midcal.157 Other cases suggest

that Midcal’s second prong can be satisfied even if the utility commission has the power to

supervise but does not exercise such power.158 Other cases stand for the general proposition that

alleged "bad acts" under Sherman Act § 2 analysis do not eliminate the ability to raise state

154 Indeed, the majority of failed immunity claims fail on this element. ANTITRUST LAW DEVELOPMENTS, supra note 26, at 1216 ("Numerous state programs have failed to afford immunity due to a lack of supervision).

155 Patrick v. Burget, 486 U.S. 94, 101 (1988) (stating that the supervisory officials must "have and exercise power to review particular anticompetitive acts of private parties and disapprove those that fail to accord with state policy."). In practice, given the realities of budgeting problems and personnel shortages, agencies may have the power to actively supervise alleged anticompetitive behavior in furtherance of state policy but do so on a less-than-vigorous basis, not because they lack power but because they lack time and money. See, e.g., Fed. Trade Comm’n v. Ticor Title Ins. Co., 504 U.S. 621, 639-43 (1992) (Scalia, J., concurring); AREEDA & HOVENKAMP, supra note 8, ¶ 226c2, at 471-72 (stating that agencies are "overworked, understaffed, underbudgeted, and may simply lack the will to engage in confrontational view of many technical items.").

156 In Snake River Valley Electric Ass’n v. PacifiCorp, 238 F.3d 1189 (9th Cir. 2001), the court explained that the state, not the utility, must exercise ultimate control over anticompetitive conduct in order to assure that state policy of displacing competition is adequately preserved. Id. at 1194. Since PacifiCorp had at least "partial control over the no-competition policy" by maintaining discretion over the decision to wheel power or not, the court could not hold that the state actively supervised the anticompetitive practice authorized by the Idaho statute. Id. ("This is the type of private regulatory power that the active supervision prong of Midcal is supposed to prevent."). Snake River represents a straight application of Midcal to electric utilities operating under a regulatory scheme.

157 E.g., Yeager’s Fuel v. Pa. Power & Light Co. 22 F.3d 1260 (3d Cir. 1994) (holding that a seemingly neutral Pennsylvania policy encouraging energy conservation constituted a clearly articulated state policy sufficient to satisfy Midcal’s first prong, despite its neutrality and despite the fact that the Bureau of Conservation, Economics, and Energy Planning, a branch of the Public Utility Commission, approved any conservation programs, not the state or even the PUC itself). This seemingly contradicts the "clear articulation" requirement because Pennsylvania’s policy was neutral, not clear, and a branch of the PUC, not the PUC and certainly not the "state itself" actively supervised the utility’s conduct.

158 E.g., TEC Cogeneration v. Florida Power & Light Co., 76 F.3d 1560 (11th Cir. 1998) (stating that the proper inquiry is whether "the State of Florida, through its state regulatory agency, . . . actively supervised FPL in the areas of wheeling, rates, and interconnection" although the Florida’s utility commission did not exercise its power to do so in the instant case). TEC Cogeneration could thus stand for the broad proposition that the state’s power to supervise, even if not exercised, could satisfy the second prong of Midcal.

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action immunity.159 The nuances raised by these cases, however, do not change Midcal’s

standard but do represent a range of Midcal interpretations in the electric power industry.

V. LEVERAGE THEORY LIABILITY IN THE GENERATION MARKET: A PROPOSED ANALYSIS

The likely antitrust scenario in the wake of Pennsylvania’s restructuring is the leveraging

scenario, where incumbents potentially could use their power as legal monopolies in local

distribution and intrastate transmission to gain advantages in the competitive generation market.

The first part of the proposed analysis would require the court to find that the incumbent has

monopoly power in the local distribution and intrastate transmission markets.160 Since the

incumbent enjoys a legal monopoly in both markets, it is likely that the court would find

monopoly power in the local distribution and intrastate transmission markets.

Second, the court must define the relevant market. Given that the Restructuring Act has

deregulated generation, it seems clear that the relevant market would be generation in

Pennsylvania—generation being the product and Pennsylvania being the geography. In terms of

product, this is so because consumers can choose to substitute their current generation with

generation from other providers.161 In terms of geography, it is likely that consumers would turn

to only those competitors licensed to provide service in Pennsylvania.162

159 E.g., Trigen-Oklahoma City Energy Corp. v. Oklahoma Gas & Electric Co., 244 F.3d 1220 (10th Cir. 2001) (court declined to hold that alleged "bad acts" by OGE eliminated state action immunity or that because a regulated utility was competing in the unregulated "cooling services market," immunity could not attach).

160 See generally United States v. Griffith, 334 U.S. 100, 107-09 (1948).161 Whatever the price of transmission and distribution, consumers could not turn to transmission or

distribution as a "substitute" for generation. If transmission rates, for example, are priced at $1.00/kWh, and generation rates rise to $4.00/kWh, consumers could not substitute transmission for generation. If, however, prices for generation increase, consumers could turn to other generation providers as a substitute.

At the margins, of course, customers might substitute natural gas or other fuel for electricity. If the use of electricity is exclusively the source of light in the home, for example, these alternative become less "interchangeable."

162 66 PA. CONS. STAT. § 2809(a) (1999) (requiring EGSs to obtain a license before providing competitive services in the generation market). It is possible that out-of-state competitors could be licensed to provide service to Pennsylvania consumers, but the usual scenario seems to be that Pennsylvania competitors operate in the competitive generation market and provide generation to Pennsylvania consumers. 66 PA. CONS. STAT. § 2809(a). It is also worth noting that many licensed providers have the capability of providing generation in many states. Nonetheless, Pennsylvania consumers cannot shop for generation from suppliers that are not licensed in Pennsylvania

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Third, the court must determine whether the incumbent willfully acquired or maintained

its monopoly power in the generation market. At this point, leverage theory becomes relevant.

The court must apply one of three standards, as outlined above in Part III.C, to determine

whether the incumbent has either (1) gained an advantage in the generation market, (2) attempted

to monopolize the generation market, or (3) actually monopolized the generation market by

virtue of its monopoly power in the local distribution and transmission markets.

A. Monopoly Power Used to Gain an Advantage in the Generation Market

Under a broad reading of the leverage theory, which requires that the incumbent have an

"advantage" in the competitive generation market,163 incumbents certainly would have an

advantage over competitors. Competitors might find it difficult to offer service to customers who

have been customers providing service for years before restructuring, and competitors might find

it difficult to construct generation facilities or buy generation facilities from incumbents in order

to offer service. The market power in the generation market would not matter. What would

matter is that the incumbent, by virtue of its monopoly power in transmission and distribution,

can stifle potential competitors in the generation market.

B. Monopoly Power Used to Attempt to Monopolize the Generation Market

Under a moderate reading of the leverage theory, which requires that the incumbent

attempt to monopolize the generation market,164 there must be a likelihood that the incumbent

will monopolize the generation market165 because of its monopoly power in the intrastate

transmission and local distribution markets. If the incumbent, for example, purchases, constructs,

or acquires a significant amount of the generation facilities in the relevant market, then there

would be sufficient evidence, although not conclusive evidence, that the incumbent attempted to 163 As noted earlier, it does not appear that courts have adopted a leverage theory as broad as the one

proposed. See supra note 125. 164 Berkey Photo v. Eastman Kodak Co., 603 F.2d 263, 276 (2d Cir. 1979).165 On attempted monopolization, see supra note 94.

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monopolize the generation market.

C. Monopoly Power Used to Actually Monopolize the Generation Market

Under a narrow reading of the leverage theory, which requires that the incumbent

actually monopolize the generation market,166 the court must find that the incumbent is operating

as it was under the traditional regulatory scheme, where the monopoly generated, transmitted,

and distributed electricity to the exclusion of all others. Under this reading, the court must query

whether the incumbent has at least fifty percent (if not more) of the generation market and

whether the incumbent can raise prices above competitive levels. The court must also inquire

into the "bad acts" that the incumbent utility carried out to acquire or maintain its monopoly

status in the generation market, such as buying up all the generation facilities in the service area

in order to exclude all other competitors from the generation market.

VI. STATE ACTION IMMUNITY: CAN THE DOCTRINE STILL APPLY?

Assuming that incumbents violate the Sherman Act under an admittedly broad leverage

theory analysis, the question becomes whether state action immunity applies. The usual scenario

in the analysis consists of a state statute setting forth a regulatory scheme that permits some level

of anticompetitive conduct. As one commentator has already noted, however, the problem with

applying Midcal to restructuring legislation such as Pennsylvania’s is that the legislation clearly

articulates a state policy in favor of competition rather than a policy of displacing competition

with regulation.167 The court must therefore differentiate between competitive conduct and

regulated conduct contemplated by the restructuring legislation to determine whether alleged

anticompetitive behavior will be shielded by state action immunity.

166 Alaska Airlines, Inc. v. United Airlines, Inc., 948 F.2d 536 (9th Cir. 1991).167 E.g., Schwartz, supra note 16, at 1487 (stating that Midcal’s first prong cannot be satisfied because

deregulation states clearly articulate a policy in favor of competition). See 66 PA. CONS. STAT. § 2802 (1999) (requiring competition in the retail generation industry).

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A. Clear Articulation in Pennsylvania’s Restructuring Act

The Restructuring Act continues its policy of displacing competition with regulation with

respect to intrastate transmission and local distribution. As such, any activity in the local

distribution and transmission markets would be regulated conduct, the anticompetitive effects of

which could be supported by a clearly articulated state policy of displacing competition with

regulation.168 Although the Act indicates that the generation market is a competitive one, that

policy does little to affect the tightly regulated markets of transmission and distribution.169

Accordingly, any alleged anticompetitive conduct in the transmission and distribution markets

can be supported by a clearly articulated policy of displacing competition with regulation.170

With respect to the generation market, the Act clearly articulates a policy displacing

regulation with competition—the exact opposite of Midcal’s first prong. As such, any activity in

the generation market would be competitive conduct, the anticompetitive effects of which could

not be supported by a clearly articulated state policy of displacing competition with regulation.171

To satisfy Midcal’s first prong, the incumbent must resort to one of two arguments. First, the

state’s interest in maintaining the public interest, a policy that arguably displaces competition

with regulation, trumps the policy in favor of competition. Any anticompetitive behavior, one

could argue, was necessary in furtherance of the paramount state policy of preserving the public

168 66 PA. CONS. STAT. § 2802(16) (1999) (transmission and distribution remain tightly regulated); see supra Part II.B.

169 Popowsky Interview, supra note 29. 170 Schwartz, supra note 16, at 1488 ("[S]tate deregulation plans explicitly provide that the transmission and

distribution components of the industry will remain regulated. Such explicit declarations of state intention to [regulate transmission and distribution] will therefore provide the clearly articulated state policy in favor of suppressing competition.").

171 If a competitor challenges an incumbent’s refusal to open access, for example, that practice would not be supported by a clearly articulated policy displacing competition because the Act articulates a policy clearly in favor of competitive open access. Id. at 1487. Suppose also that an incumbent buys, constructs, or acquires generation facilities for the sole purpose of competing in the generation market. The Restructuring Act might be classified as neutral on its face—that is, the incumbent, not the state, determines whether the incumbent will create new entities to compete in the generation market and whether the incumbent will behave anticompetitively. In that scenario, the Restructuring Act is neutral, and again, the articulation prong would not be satisfied.

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interest.172 Second, the incumbent could argue that the anticompetitive conduct in question was

foreseeable to the state because the Act charges the PUC with the duty of monitoring

anticompetitive conduct in the generation market.173 Otherwise, it seems difficult to claim that

state action immunity applies when the Restructuring Act, on its face, clearly displaces

regulation with competition.174 Indeed, it seems that the entire question of state action immunity

will turn on the articulation prong of Midcal.

B. Active Supervision Under Pennsylvania’s Restructuring Act

Assuming that the incumbent surpasses the seemingly insurmountable articulation hurdle,

the active supervision prong would be less problematic. As we have seen thus far, the

Restructuring Act does not detract from the power of the PUC to actively supervise what would

otherwise be Sherman Act violations in the intrastate transmission and local distribution markets.

Utilities that operate intrastate transmission and local distribution facilities are legal monopolies

subject to rigorous PUC supervision in terms of rates175 and general utility service provision.176

Accordingly, Midcal’s second prong would be satisfied in the event that incumbents face

allegations of Sherman Act violations in the local distribution and transmission markets.

In the generation market, Midcal’s second prong will likely be satisfied because the PUC

172 There is some support for this proposition in the Restructuring Act itself: "Reliable electric service is of the utmost importance to the health, safety and welfare of the citizens of the Commonwealth. Electric industry restructuring should ensure the reliability of the interconnected electric system by maintaining the efficiency of the transmission and distribution system." 66 PA. CONS. STAT. § 2802(12) (1999). Thus, even if the incumbent behaves "anticompetitively" in the generation market, the incumbent could argue that such behavior was necessary to avoid violating other provisions of the public utility code or other orders from the PUC relating to system reliability or other matters that fall under the "public interest" umbrella.

173 Suppose that the incumbent buys, constructs, or acquires generation facilities for the sole purpose of competing in the generation market. The incumbent might satisfy the articulation prong by arguing that the practice of buying, constructing, or acquiring generation facilities and the arguable anticompetitive effect thereof was clearly foreseeable to the state when passing the Restructuring Act because the Act contemplates that incumbents would engage in such practices. The Act even charges the PUC with the duty to monitor the market for illegal use of market power and to approve mergers. 66 PA. CONS. STAT. § 2811(a), (e). This could bolster the incumbent’s claim that anticompetitive behavior was clearly foreseeable to the state.

174 Accord Schwartz, supra note 16, at 1487.175 See, e.g., 66 PA. CONS. STAT. § 1301 (relating to rate regulation).176 See, e.g., id. § 1501 (relating to service regulation).

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has the power to supervise the generation market. For instance, the PUC has the power (1) to

ensure reliable and continuous utility service throughout the Commonwealth, (2) to act as a

monitor of market power in the competitive generation market, and (3) to approve generation

rates that competitors must compete against. Whether the PUC in fact exercises such power must

be determined with each case that comes to pass, but it appears that there is sufficient

supervision by the state to satisfy Midcal’s second prong.

SUMMARY AND CONCLUSION

The induction of competition in the generation market, at the very least, gives rise to the

question of Sherman Act liability under leverage theory. The generation market, while appearing

to be a competitive one, is still subject to significant regulation by the state, so state action

immunity is still relevant. The question of immunity will likely turn on whether the state clearly

articulated a policy displacing competition with regulation even though restructuring legislation

facially suggests that the state articulates a policy displacing regulation with competition.

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