ML19329A888

Findings of Fact & Conclusions of Law of DOJ to Determine Whether Activities Under Licenses Would Create or Maintain Situation Inconsistent W/Antitrust Laws.Certificate of Svc Encl

ML19329A888
Person / Time
Site:	Davis Besse, Perry
Issue date:	08/23/1976
From:	Berger M, Charno S, Urban J JUSTICE, DEPT. OF
To:
References
NUDOCS 8001150780
Download: ML19329A888 (53)

Text

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UNITED STATES OF AMERICA

(^ NUCLEAR REGULATORY COMMISSION BEFORE THE ATOMIC SAFETY AND LICENSING BOARD In the Matter of -)

)

The Toledo Edison Company and )

The Cleveland Electric Illuminating ) Docket Nos. 50-346A C.ompany ) 50-500A (Davis-Besse Nuclear Power Station, ) 50-501A Units 1, 2 and 3) -)

) .

The Cleveland Electric Illuminating ) Docket Nos. 50-440A Company, et al. ) 50-441A (Perry Nuclear Power Plant, )

Units 1 and 2) )

FINDINGS OF FACT AND CONCLUSIONS OF LAW OF THE UNITED STATES DEPARTMENT OF JUSTICE

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D.ONALD I. BAKER Acting Assistant Attorney General Antitrust Division JOSEPH J. SAUNDERS STEVEN M. CHARNO Attorney, Deps tment ..

of. Justice MELVIN G. BERGER JANET R. URBAN s

Attorneys, Department of Justice E. GREGORY BARNES-Research An'lyct Department of Justice August 23, 1976 80011so7po 4

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TABLE OF CONTENTS Page INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . 1 I. THE FACTUAL SETTING FOR ANTITRUST REVIEW . . . . . . 4 A. THE APPLICANTS . . . . .. . . .- . . . . . . . . 4

' l. The Cleveland Electric Illuminating, Company 4

2. Duquesne Light Com~pany . . . . . . . . . . 5 3 '. Ohio Edison Company . . . . . . . . . . . 5

4. Pennsylvania Power Company . . . . . . . . 6

5. The Toledo Edison Company . . . . . . .. . . I B. DESCRIPTION OF THE INDUSTRY . . . . . . . . . . 8

1. Principles of Productio'n and Coordination . 10

a. Reserve Sharihg . . . . . . . . . . . . 13 b.

Coordinated Development . . . . . . . . . 16

c. Joint Transmission, Arrangements (Wheeling) 19

2. Central Area Power Coordination Group . . . 22 C. COMPETITION IN THE ELECTRIC POWER INDUSTRY . . . 28

1. Generally . . . . . . , . . . . . . . . . . 28

2. Sale of Firm Power at Wholesale . . . . . . 29

.3. Sale of Power at Retail . . . . . . . . . . 32 II. THE SITUATION INCONSISTENT WITH THE ANTITRUST LAWS . 35 A. THE STANDARD'OF SECTION 105c . . . . . . . . . . 35

1. The Situation . . . . . . . . . . . . . . . 35

2. The Standard of " Inconsistency" s . . . . . 36 -

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4 Page B. THE ANTITRUST LAWS AND THE POLICIES UNDERLYING THOSE LAWS . . . . . . . . . . . . . . . . . . 37

1. Agreements and Conspiracies in Restraint of Trade . . . . . . . . . . .  : ....... 37

a. Conspiracy Under the Sherman Act . . . 38

b. Per Se Violations . . . . . . . . . . . 41

2. The Law of Monopolization . . . . . . . . . 44

a. Refusals to Deal . . . . . . . . . . . 47

b. " Bottleneck" Monopo'ization . . . . . . 49

. c. Other Exclusionary Practices

. . . . . 51

3. The Relevant Markets . . . . . . . . . . . 52 C. APPLICANTS' M0liOPOLY POWER . . . . . . . . . . . 57 D. APPLICANTS' ACTIVITIES . . . . . . . . . . . . . 60

1. The Clevelard Electric Illuminating Company 60

a. Coordinated Operation and Development . 60

b. Acquisition . . . . . . . . . . . . . . 78 Duquesne Light Company '.

2. . . . . . . . .. 80

a. Coordinated Operatis and Development . 80

b. Acquisition . . . . . . . . . . . . . . 85

3. Ohio Edison Company and Pennsylvahia Power Company . . . . . . . . . . . . . . 91

a. Coordinated Operation and Development . 91 l

b. Foreclosure of Retail Competi' tion . . . 98

c. Acquisition . . . . . . . . . . . . . . 105 s

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4. The Toledo Edison Company . . . . . . . . . 106

a. Coordinated Operation '.nd De'velopment . 106

b. Foreclosure of Retail Competition . . . 123

c. Acquisition'. . . . . . . . . . . . . . 125

5. CAPCO . . . . . . . . . . . . . . . . . . . 128 III. MAINTENANCE OF THE SITUATION . . . . . . . . . . . . 140 IV. RELIEF . . . . . . . . . . . . . . . . . . . . . . . 144 CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . 150 Proposed findings of fact contained herein are preceded by sequential numerical designations, conclusions. of law are designated by the initial "L" followed by a number.

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i TABLE OF AUTHORITIES CASES: Page Alabama Power Company (Joseph M. Farley Nuclear Plant, Units 1 and 2), L3P-73-5, RAI-73-2, 85 (1973) . . . . . 35 American Tobacco Co. v. United States, 147 P.2d 93 (6th Cir. 1944), aff'a, 328 U.S. 781 (1946). . . . . . . . . 38, 39, 44, 45, 46, 57 Associated Press v. United States, 326 U.S. 1 (1945). . . 49, 50 Brown Shoe Co. v. United States, 370 U.S. 294 (1962). . . 53 Cantor v. Detroit Edison Co., 44 U.S.L.W. 5357 (1976) . . 29, 83 C. Howard Hunt Pen Co. v. Federal Trade Commission, 197 F.2d 271 (3d Cir. 1952) . . . . . . . . . . . . . . . . 146 City of Mishawaka, et al. v. Indiana & Michigan Electr'ic Co., 1975 CCH Trade Cases 160,318 (N.D. Ind. 1975). . . 52 Clinton Watch Co. v. Federal Trade Commission, 291 F.2d 838 (7th Cir. 1961), cert. denied, 368 U.S. 952 (1962). 146 Commonwealth v. National Gettysburg Battlefield Tower, Inc., 454 Pa. 193, 311 A.2d 588 (1973). . . . . . . . . 22

- Consumers Power Co. (Midland Units 1 & 2), LBP-75-39, 2 N.R.C.I. 29 (1975). . . . . . . . . . . . . . . . . . 43, 53 Dejoy Stores, Inc. v. Federal Trade Commission, 200 F.2d 865 (2d Cir. 1952). . . . . . . . . . . . . . . . . . . 146 -

Delli Paoli v. United States, 352 U.S.'232 (1957) . . . . 41 Department of Environmental Resources v. Public Utility Commission, 335 A.2d 860 (1975) . . . . . . . . . . . . . 22 Diener's Inc. v. Federal Trade Commission, 494 F.2d 1132 (D.C. Cir. 19 / 4 ) . . . . . . . . . . .. . . . . . . . . 145 Doherty,- Clif ford , S teers & Shenfield, Inc. v. Federal Trace Commission, 392 F.2d 921 (6th Cir. 1968). . . . . 146

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Page Dolcin Corp. v. Federal Trade Commission, 219 F.2d 742

- (D.C. Cir. 1954), cert. denied, 348 U.S. 981 (1955) . . 146 Eastern States Retail Lumber Dealers Ass'n v. United States, 234 U.S. 600 (III4) . . . . . ..". ...... 38 Eastman Kodak Co. v. Southern Photo Materials Co., 273 U.S. 35o (1977T . . . . . . . . . . . . . . . . . . . . 47 Ethyl Gasoline Corp. v. United States, 309 U.S. 436 (1940). . . . . . . . . . . . . . . . . . . . . . . . . 38, 42 Federal Power Commission v. Constay Corp., 44 U.S.L.W. 4777 (1976). . . . . . . . . . . . . . . . . . . . . . . . . 27, 29, 51, 52 Federal Power Commission v. Southern California Edison Co.,

376 U.S. 205 (1964) . . . . . . . . . . . . . . . . . . 32 Federal Trade Commission v. National Lead Co., 352 U.S. 419 (195,7). . . . . . . .  ; . . . . . . . . . . . . . . . . 146

' Ford Motor Co. v. United States, 405 U.S. 562 (1972). . . 145 Fox v. United States, 381 F.2d 125 (9th Cir. 1967). . . . 40

' Free v. Bland, 369 U.S. 663 (1962). . . . . . . . . . . . 32 Frey & Son, Inc. v. Cudahy Packing Co., 256 U.S. 208 (1921). . . . . . . . . . . . .. . . . . . . . . . . . . 39 Gainesville Utilities Department v. Florida Power Corp.,

402 U.S. 515 (1571) . . . . . . . . . . . . . . . . . . 148 Gamco, Inc. v. Providence Fruit & Produce Building, Inc.,

194 F.2d 184 (15t Cir. 1952), cert, genIed7 344 U.S.

817 (1952). . . . . . . . . . . . . . . . . . . . . . . 49, 50 Georgia v. Pennsylvania Railroad Co., 324 U.S. 439 (1944) 43 Giant Food, Inc. v. Federal Trade Commission, 322 F.2d 977 ,

(D.C. Cir. 1963), cert. denied, 376 U.S. 967 (1964) . . 146 l Gulf S tates__ Utilities v. Federal Power Commission, 411 U.S. I 747 (1973). . . . . . . . . . . . . . . . . . . . . . . 29 s 1 v j l

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i Page Hernandez v. United States, 300 F.2d 114 (9th Cir.

1972) . . . . . . . . . . . . . . . . . . . . . . . . 40 Hitchman Coal & Coke Co. v. Mitchell, 245 U.S. 229 (1917). .

. . . . . . . . . . . . .. . . . . . . . 40, 41 Illinois Natural Gas Co. v. Central Illinois Public Service Co., 314 U.S. 498 (1947). . . . . . . . . . . 32 Int'ernational Salt Co. v. United States, 322 U.S. 392 (1947). . .. . . . . . . . . . . . .- . . . . . . . . 145 Interstate Circuit v. United States, 306 U.S. 208 (1939) 39 Kansas Gas and Electric Company and Kansas City Power and Light Company (Wolf Creek Generating Station, Unit No. 1),

ALAB-279, 1 N.R.C.I. 559 (1975) . .. . . . . . . . . 35, 141 Klors Inc. v. Broadway Hale Stores, Inc. , 359 U.S. 207 (1959). . . . . . . . . . . . . . . . . . . . . . . , 43 .

Libbey-Owens-Ford Glass Co. v. Federal Trade Commission, 352 F.2a 415 (6tn Cir. 1965). . . . . . . . . . . . . 146 Lorain~ Journal Co. v. United States, 342 U.S. 143 (1951) 47 Luteran v. United States, 93 F.2d 395 (8th Cir. 1937),

cert. denied, 303 U.S. 644 (1938) . . . . . . . . . . 40

' Montana-Dakota Utilities Co. v. Northwestern Public

, Services Co., 341 U.S. 246 (1951) . . . . . . . . . . 27 Morton Salt Co. v. United States, 235 F.2d 573 (10th Cir.

1948) . . . . . . . . . . . . . . . ,. . . . . . . . . 40 Nash v. Florida Industrial Commission..'389 U.S. 235 (1967)

. 32 Nash v. United States, 229 U.S. 373 (1913). . . . . . . 38 Northern Pacific Railroad v. United States, 356 U.S. 1 (1956). . . . . . . . . . . . . . . . .. . . . . . . . 36, 42 Nye & Nissen v. United States,168 F.2d 846 (9th Cir.

1948), aff'd, 336 U.S. 613 (1949) . . . . . . . . . . 40 Otter Tail Power Co., 2 F.P.C. 134 (1940) . . . . . . . 27 I

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. Packaged Procrams, Inc. v. Westinghouse Broadcasting, 225 47 t'. 2a 7 0 8 (7d Cir. 1958) . . . . . . . . . . .. . . .

Pettibone v. United States, 148 U.S. 197 (1893) . . . . 38 Public Utilities Commission v. Attleboro Steam and Electric Co., 173 U.S. 83 (1927) . . . . . . . . . . . . . . . 32 Riss & Co. v. Association of_American Railroads, 187 F. Supp.

306 (D.D.C. 1960), rev'd on other grounds, 299 F.2d 133

-(D.C. Cir.), cert. denied 7 370 U.S. 916 (1962). . . ., 40 Schine Theatres v. United States, 334 U.S. 110 (1948) . 39 Six Twenty-Nine Froductions v. Rollins Telecasting, Inc.,

365 F.2d 478 ( 5 th Cir . 1966 ) . . . . . . . . . . . . . 47 379 (1963). 32

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Sperry v. Florida, 37'3 U.S. . . . . . . . .

. Standard Distributors, Inc. v. Federal. Trade Commission, .

211.F.2d 7 (2d Cir. 1954) . . . . . . .. . . . . . . . 146 Standard Sanitary Manufacturing Corp. v. United States, 226 U.S. 20 (1912). . . . . . . . . . . . . . . . . . 42 State ex rel. White v. City of Cleveland, 125 Ohio St. 230, 181 N.E.2d 24 (1931'. . . . . . . . . . . . . . . . . 22 Swift & Co. v. United States, 196 U.S. 375 (1905) . . . 40 T'ravelers Insurance Co. v. Wadswor th, 109 Ohio St. 440, 142 N.E. 900 (1924) . ... . . . . . . . . . . . . . . 22

' United States v. Aluminum Company of America, 148 F.2d 416 (23 Cir. 1945). . .. . . . . . . . . . . . . . . . 45, 53

-United States v. Arnold, Schwinn and Co., 338 U.S. 365 (1967). . . .- . . . . . . . ............. 43, 45 United _ States v. Bethlehem Steel Corp. . 168 F. Supp. 576 (S.D.N.Y. 1958).. . . . . . ............. 57 United States v. Central States _ Theatres _ Corp. , 187 F. Supp.

114 (D. Neb. 1960). . . . . .. . . . . . . . . . . . . 38 United States v. Chas. Pfizer & Co.. Inc., 246 F. Supp.

464-(E.D.N.J.~. 1965) . . . . T............. 53. . .

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Page United States v. Consolidated Laundries Corp. , 291 F.2d 563 (2d Cir. 1961). . . . . . . . . . . . . . . . . . 46 United States v. Costello, 352 F.2d 848 (2d Cir. 1965). 41 United States v. E.I. duPont de Nemours & Co., 351 U.S.

377 (1956). . . . . . . . . . . . . . . . . . . . . . 53 United States v. E.I. duPont de Nemours & Co., 353 U.S.

586 (1957). . . . . . . . . . . . . . . . . . . . . . 57, 145 United States v. E.I. duPont de Nemours.& Co., 366 U.S.

316 (1961). . . . . . . . . . . . . . . . . . . . . ., 145 Un,ited States v. General Electric Cc. 80 F. Supp. 989 (S.D.N.Y. 1948) . . . . . . . . . . . . . . . . . . . 46 United States v. Greater Buff alo Press, 402 U.S. 549 (1971). . . . . . .. . . . . . . . . . . . .. . . . . 53 United States v. Griffith, 334 U.S. 100 (1948). . . . . 45, 46 I United States v. Grinnell Corp., 384 U.S. 563 (1966).

. 44, 46, 52, 53

. 57, 145 United S tates v. Gypsum Cc. , 333 U.S. 364 (1948). . . . 41 United States v. Hyde, 225 U.S. 347 (1912). . . . . . . 41 United States v. -International Business Machines, 1975 CCH Trade Cases 160,495 (S.D.N.Y. 1975) . . . . . . . . . 46 United States v. Jerrold Electronics Corp. , 187 F. Supp.

545 (E.D. Pa. 1960) . .. . . .. . . . . . . . . . . . 46

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United States v. Kissel,,218 U.S.'601 ,(1910). . . . . . 41 United States v. Manton,107 F.2d 834 (2d Cir. 1938). . 40 United States v. Masonite Corp., 316 U.S. 265 (1942). . 39 United States v. McGann, 431 F.2d 1104 (5th Cir.), cert.

denied, 401 U.S. 319 (1970) . . . . . . . . . . . . . 40 United States v. Otter Tail Power Company, 331 F. Supp. 54 l (D. Minn. 1971), aff'd in part, 4I0 U.S. 366 (1973) . 29, 31,  ;

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Page United States v. Paramount Pictures, 334 U.S. 131 (1948). 46 United States v. Patten, 226 U.S. 525 (1913). . . . . . . 39 United States v. Perlstein, 126 F.2d 789 (3d Cir. 1942) .- 41 United States v. Philadelphia'Na*.ional Bank, 374 U.S. 321 (1963). . . . . . . . . . . . . . . . . . . . . . . . . 29, 37, 53, 54 United States v. Phillipsburg National -Bank, 399 U.S. 350 (1970). . . . . . . . . . . . . . . . . . . . . . .  ; . 53 United States v. Reading Co., 226 U.S. 324 (1912) . . . . 42 United Slates v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940) 38, 42, 46 United States v. Stromberg, 268 F.2d 256 (2d Cir. 1959),

cert, denied, 361 U.S. 663 (1959) . . . . . . . . . . . 41 ,

United States v. Terminal Railroad Ass'n. , 224 U.S. 383 (1912). . . . . . . . . . . . . . . . . . . . . . . . . 49, 50 United States v. Topco Associates, 405 U.S. 509 (1972). . 43 United States v. Trenton Potteries Co., 273 U.S. 392 (1977). . . . . . . . . . . . . . . . . . . . . . . . . 38, 43 United States v. ' United Shoe __ Machinery Corp. , 110 F. Supp. 295 (D. Mass. 1953), affrd per curiam, 347 U.S. 521 (1954). 45, 57 United States v. United States Gypsum Co., 340 U.S. 76 (1970). . . . . . . . . . . . . . . , . . . . . . . . . . 145 United States v. Ward Baking Co. , 224 N. Supp. 66 (E.D.

Pa. 1963) . . . . . . . . . . . . . . . . . . . . . . . 40 Van Camo_& Sons Co. v. American Can Co., 278 U.S. 245 (1979). . . . . . . . . . . . . . . . . . . . . . . . . 57 -

Wisconsin _ Poker & Light _Co. v. Public Service Commission, T

172 N.W.2d 639 (1969) . . . .. . . . . . . . . . . . . . 118 i l

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i Page STATUTORY AND LEGISLATIVE MATERIAL:

Atomic Energy Act of 1954, Section 105c, 42 U.S.C. S2135c 35, 36

. 28'C.F.R. Section 50.60 . . . . . . . .. . . . . . . . . 115 H. Rep. No . l'318, 74 th Cong . , 1 st Sess . ' (193 5 ) . . . . . . 32 9.R. Rep. No. 91-1470, 91st Cong., 2d Sess. (1970). . . . 36 Joiht Committee on Atomic Energy, Hearings on S. 3323 and H.R. 8862 to Amend the Atomic Energy Act of 1946, 83rd

-Cong., 2d Sess., Part 2 (1954). . . . . . . . . . . .. . 45 Ohio Constitution, Article XVIII, S4. . . . . . . . . . . 33 Ohio Constitution, Article XVIII, S6. . . . . . . . . . . 35 Ohio Revised Code, Se.c tion 4905.261 . . . . .. . . . . . 34 Ohio Revised Code, Section 4906 . . . . . . . . . . . . . 21 Pennsylvania Act. No. 57, Session of 1975 (Jul,y 30, 1975) 34 53 P.S. Section 314 , . . . . . . . . . . . . . . . . . . 33 53 P.S. Section 46501 . . . . . . . . . . . . . . . . . . 33 66 P.S. Section 1122(g) . . . . . . . . . . . . . . . . . 35 Public Utility Holding Company Act_, 15 U.S.C. Sections 79 et seg. . . . . . . . . . . . . . . . . . . . . . . . . 105 S. Rep. No. 621, 74th Cong., 1st Sess. (1935) . . . . . . 32 S. Rep. No. 91-1247, 91st Cong., 23 Sess. (1970). . . . . 36 Sherman Act, Section 1, l'5 U.S.C. Section 1 . . . . . . . 37, 41, 46, 51 Sherman Act, Section 2, 15 U.S.C. Section 2'. . . . . . . 37, 44, 46, 47,

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• UNITED STATES OF AMERICA

' NUCLEAR REGULATORY COMMISSION BEFORE THE ATOMIC SAFETY AND LICENSING BOARD In the Matter of )

)

The 'oledo T Edison Company and )

The Cleveland Electric Illuminating h Locket Nos. 50-346A Company ) 50-500A (Davis-Besse Nuclear Power Station, ) 50-501A Units 1, 2 and 3) )

)

The Cleveland Electric Illuminating ) Docket Nos. 50-440A Company, et al. -) 50-441A (Perry Nuclear Power Plant, )

Units 1 and 2) )

FINDINGS OF FACT AND CONCLUSIONS OF LAW OF THE UNITED STATES DEPARTMENT OF JUSTICE INTRODUCTION

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The objective of a proceeding pursuant to Section 105c of the Atomic Energy Act is to determine *whether the activities under the license (s) would create or maintain a situation inconsistent with the antitrust laws." If the Board finds affirmatively on that. question, it must then determine whether the licenses should be issued, continued, modified or condi-tioned as the Board deems appropriate.

The evidence presented at . hearing shows that in large portions of Pennsylvania and Ohio there has existed and

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continues to exist a situation inconsistent with the antitrust laws. The evidence further shows that the granting of an unconditioned license would serve to maintain, and indeed exacerbate, this situation.

It has been established that each Applicant possesses dominance in generation and transmission in the area in which it serves and each has monopoly power in the relevant whole-sale and retail markets. The evidence further demonstrates that, collectively, the Applicants possess dominance in genera-tion and transmission as well as monopoly power in the relevant

" regional power exchange" and " bulk power services" markets throughout the combined CAPCO companies' territory ("CCCT").

The record demonstrates that Applicants have misused their

• dominance and monopoly power in a conspiracy to monopolize, as well as in individual and collective monopolization of the ~

relevant markets. In furtherance thereof', Applicants have engaged in exclusionary conduct violative of and inconsistent with the antitrust laws. Individual'ly a'nd collectively, they have sought to eliminate actual and potential competition within the relevant markets by agreeing and conspiring in restraint of trade, by denying the benefits of coordinated operation and development to their competitors, and by acquiring compe* ting systems within their . individual service areas.

The record further demonstrates that the subject nuclear units, which will produce low-cost, base load power, and the 2

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attendant transmission network will become an integral _ part of Applicahts' systems. The unrestricted marketing of power from these units will strengthen i maintain Applicants' dominEnce and monopoly power. Unlesc _eense conditions are imposed which eliminate the presently existing situation inconsistent with the antitrust laws and restore the competitive balance intentionally destroyed by Applicants, the licensing of these units will act to further and maintain Applicants' monopolization.

The Applicants in this consolidated proceeding are The Clev'el'nda Electric Illuminating Company, Duquesne Light Company,

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The Toledo Edison Company, Ohio Edison Company and its wholly-owned subsidiary, Pennsylvania Power Company. Together, they propose to construct and operate nuclear power generating '

station,s named Davis-Besse' Nuclear Power Station, Units 2 and 3', and Perry Nuclear Power Station, Units 1 and 2. 1/ Two of the Applicants, The Toledo Edision Company and The Cleveland Electric Illuminating Company, p'ropose to construct and operate another unit, Davis-Besse Nuclear Power Station, Unit 1.

The other parties to this proceeding are the Department of Justice, the NRC S ta f f , the City of Cleveland and the State of Ohio. American Municipal Power-Ohio (" AMP-O"), which was originally granted leave to intervene, withdrew from the proceeding on September 18, 1975.

On December 8, 1975, hearings commenced; the record was closed as to all evidentiary matters on August 11, 1976, 1/ Applicants also propose to construct and operate Beaver Valley Power Station, Unit No. 2 (see AEC Docket No. 50-412A).

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. I. THE FACTUAL SETTING FOR ANTITRUST REVIEW A. THE APPLICARTS

1. The Cleveland Electric Illuminating Company 1.01 The Cleveland Electric Illuminating Company ("CEI") is a vertically integrated, investor-owned utility which serves an area in and surrounding the City of Cleveland of approximately 1,700 square miles which he,s a population of approximately 2,100,000 people (NRC 157, License Application, pp. 3, 5). 2/

CEI does.not provide full or partial requirements wholesale elec-tric service to any municipal or cooperative electric utility

.( DJ 587, pp. 64-65). In 1973, CSI had electric operating revenues in excess of'S322,931,000 and a' net generating capacity of about 4,000 mw (NRC 157, CEI Annual Report, p. 19, License Application,

p. 3).-

1.03 CEI was incorporated in Ohio in 1892, as the Cleveland General Electric Company, a consolidation of the. Brush Electric Light and Power Company and the Cleveland Electric Light Company Presently, the' only two municipal generating

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( DJ 5 87, p . 64).

systems which remain in the 1,700 square mile territory served by CEI are those of the City of Painesville and the City of Cleveland

("MELP") (DJ 587, p. 64). CEI has acquir'ed all other private and

. municipal systems which had formerly existed in its service area (DJ 587, p. 65). ,

2/ - The following abreviations of racord citations are employed l herein: "DJ" -- Department of Justice exhibit, "NRC" -- NRC Staff  ;

exhibit, "C" -- City of Cleveland exhibit, " App." -- Applicants'  ;

exhibit, and "Tr." -- transcript. -

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2. Duquesne Light Company w 1.~03 Duquesne Light Company ("DL") is an investor-owned, verti-cally integrated electric utili*.y which serves an 800 square mile area in the northwestern part of Pennsylvania, including Pittsburgh and surrounding urban areas in Allegheny and Beaver Counties, which consists of 147 communities which have a popalation of approximately 1,600,000 individuals (NRC 157, License Application, pp. 3, 7; DJ 587, p. 74). Its service area is in one o'f the most highly indus-trialized regions of the country (DJ 587, p. 74). In 1973, DL's total electric operating revenues were in excess of S241,753,000, comprised of the combined proceeds of retail sales of 12.5 billion kwh and wholesale sales of 9.2 million kwh; the company had a net generating capacity of about 2,530 mw (NRC 157, DL Annual Report,

p. 19; DJ 587, p. 74).

1.04 DL was incorporated in Pennsy.lvania in 1912. Since that time, other systems were acquired and numerous subsidiaries were merged (DJ 587, p. 74). The only municipal system remaining in the DL service area, and the only municipality to which the company sells power at wholesale, is Pitcairn which has an esti-mated generating capacity of 2500 kw' (DJ 587, S. 74). There are no cooperative systems within its service area; DL is the only electric utility therein which generates,. transmits and distributes power to ul.timate consumers (DJ 587, p. 74).

3. Ohio Edison Company 1.05 Ohio Edison Company ("0E") is a vertically integrated,

-investcr-owned utility serving an area of approximately 7,400 square i

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miles with a population of approximately 2,337,000 people in central ano northeastern Ohio (NRC 157, License Application, pp. 3, 9). OE

- supplies the full bulk power requirements of 19 municipal electric utilities and the partial bulk power requirements of one municipal s'ystem (DJ 158, p. OE-26). In 1973, OE had electric operating revenues in excess of $383,238,000 and a net generating capacity of a' bout 3650 mw (NRC 157, License Application, p. 3, OE Annual

-Report, p. 17).

1.06 OE was incorporated in 1930 as a consolidation of five private utilities, which themselves were formed by merger and acquisition (DJ 587, p. 66). As a result of acquisition of munic-ipal generating plants by OE, and abandonment of municipal generat ,

ing plants by other municipalities, there appear to be only three generating municipal systems in the service area of Ohio Edison (DJ 507, p. 68).

4. Pennsylvania Power Company 1.07 Pennsylvania Power Company ("PPC"), a wholly-owned sub-sidiary of OE, provides electrical service throughout an area of approximately 1,500 square miles in western Pennsylvania which has a population of 324,000 people (NRC.157, License Application, pp. 3, 10). PPC and OE are now and for many years have been operated as a single integrated system (App. 214; White Tr. 9495-96; Hughes Tr. 4008). There would be only one company were it not for the fact that both Ohio and Pennsylvania require tha t utility service at retail be provided by domestic corporations (White Tr.

u 9496, 9650). The two companies are run in a similar manner without ' '

6 6

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any significant differences in policy which are not required by state law (White Tr. 9650).

-1.08 PPC supplies the full bulk power requirements of five municipal systems (DJ 587,'pp. 67-68). In 1973, PPC had operating re' venues of $53,201,000 and a net generating capacity in excess of 600 mw (NRC 157, License Application, p. 3, PPC Annual Report,

p. 18). There are no generating municipal systems remaining in PPC's retail service area (DJ 587, p. 68).

-5. The Toledo Edison Company 1.09 The Toledo Edi_'n Company ("TE") is a vertically integrated, investor-owned slectric utility serving an area of

.2,500 square miles, including the City of Toledo and territory to . the west, south and east tnereof, w.ith a population of approximately 719,000 people (NRC.157,' License Application,

p. 3; DJ 587, p. 70 ) . In 1973, TE had electric operating revenues .

of $126,415,000 and a net generating capacity for that year of 1,046 mw (NRC 157, TE Annual Report, p. 9, License Application,

p. 3). In 1973, TE supplied the full bulk power requirements i

of 13 municipal electric utilities and the partial bulk power requirements of two such systems at wholesale (DJ 158, p. TE-14) .

1.10 The present company is an amalgamation of at least 190 companies a'cquired by mergers and acquisitions (DJ 587, p. 70).

By 1973, all- the systems which TE had not yet acquired purchased their_' f ull bulk power requirements f rom the company except the generating _ systems of Bryan and Napoleon, which were partially 7

3 99 e c.

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supplied by TE, and the Village of Tontagany, which purchases at wholesale from Bowling Green (which, in turn, is a full-requirements customer of TE) (DJ 587, pp. 71-72). In 1975, both Bryan and Napoleon ceased generating power, so that today all municipal systems in the TE retail service area purchase all of their bulk power requirements from TE except Tontagany (DJ 576, p. 128; Dorsey Tr. 5251).

B. DESCRIPTION OF THE INDUSTRY

, 2.01 At the outset of the electric power industry, the area which a single plant could serve was limited by the short distance that electric power could be carried with low voltage,

' direct current (Kampmeier DJ 450, p. 5 ; We in DJ 587, p. 52; Gerber App. 189, p. 8). This caused aproliferatio'n of plants as well as the utility systems and self generating industrial firms which operated them (Kampmeier DJ 450, pp. 5-6; Gerber

• App. 189, pp. 8-9),

2.02 Over the years, technological advances in the electric utility industry have created substantial economies of scale in both the generation and transmission of electric power (Wein DJ 587, pp. 49-51; Kampmeier DJ 450, pp. 20, 22-25, 38; Mozer NRC 205, pp. 14-16; Hughes NRC 207, p. 12; Tr. 3661, 3903; Gerber App.

189, p. 9; Tr. 11,534-37, 11,554-55, 11,589-90, 11,592; Williams Tr. 10,351, 10,530; Schaffer Tr. 8608; C 33, 35, 151).

2.03 For single generating units, the capital cost per kilo-watt ot capacity declines as the size of the unit increases, up to some limit which depends on the sta te of technology. So also 8

(

various operating- costs, such as maintenance and supervision, decline with increasing unit size. Heat rate in thermal plants generally improves so that fuel costs decline. As more units are added to a plant, costs directly associated with the structure (i.e., land, buildings, etc.) also decline per unit of capacity (Kampmeier DJ 450, pp. 22-23 ; Wein DJ 587, p. 49 ) . Today, the capital (i.e., capacity) and fuel costs of a 100 mw plant are approximately 60 per cent higher than those for a 1000 mw plant, _

wh'ile operating and maintenance costs are'300 per cent higher

- (Kampmeier, DJ 4 50 , pp . 22-23).

2.04 Economies of scale are also marked in transmission, with the capability of a , transmission circuit increasing approxi-

'mately as the square of its rated voltage (Bingham Tr. 8155-56; Wein DJ 587, p. 50). Since transmissio'n costs today increase far less than the square of the volta g~ e (Mozer NRC 205, pp.14-15) and since higher voltage lines require less right of way to transfer the same amount of power (Car.uso Tr.10,911; Wein DJ 587, p. 50; Firestone Tr. 11,173), the economies provided by high voltage transraission are substantial- (Wein DJ 587, p. 50; Mozer NRC 205, pp. 14-15; Firestone Tr. 11,172-73).

2.05 These developments in technology provide an economic reason and incentive to service increasingly larger loads (Gerber App. 189, p. 9, Tr. 11,531; Williams Tr. 10,530). Substantial economies of scale of genera' tion and transmission were obtained 9 -

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• throughout the industry by the acquisi, tion of and merger with smal'ler" vertically integrated companies, municipal and coopera-

~

tive systems, and self generating industrial firms (Kampmeier DJ 450, pp. 6-8; Besse DJ 559, p. 64; Gerber App. 189, pp. 8-10).

Through merger and acquisition, investor-owned svLtems' diminished in number but grew in average size.(Gerber App. 189, p. 14); they served larger areas with bigger plants and more complex long distance transmission networks (Kampmeier DJ 450, pp. 7-8)..The internal system coordination made possible within these consoli-dated systems enabled the merged utilities to benefit from economies of scale (Kampmeier DJ 450, p. 8; Gerber App. 189, pp.

8-12). -

2.06 Each of tne Applicants is a product of this process of acquisition and merger (Findings 1.02, 1.04, 1.06-1.08, 1.10) and is therefore in a position to participate in the benefits of scale economies (Wein DJ 587, p. 63).

l.. Principles of Product' ion and Coordination 2.07 Most userc of electric power want and expect that power available 100 per cent of the time, or as close thereto as possible.

" Firm power" is the term for power supply which is considered to be continuously available to meet the needs of such users. (Wein DJ 587, p. 97; Kampmeier DJ 450, p. 37.)

2,08 Generating units are subject ~ to mechanical failure or

" forced outage" which requires their removal from service.

They are also out of service periodically for maintenance. Because generators are not available 100 per cent of the time, electric utilities must maintain generation in excess of their loads, or

, 10

,,, g.

y "rese'rves," in order to provide the continuity of service, or

" firm power," their users expect. (Wein DJ 587, p. 60; Kampmeier DJ 450, p. 20.)

2.09 F6r very small systems operating in isolation, "the single largest unit down" standard of reserves is appropriate.

This means the system must set aside as reserves an amount of generating capacity equal to the capacity of its largest gener-ating unit, so as to insure that it will be able to meet its load in the' event that unit suffers a forced outage. Thus, a small

- distribution system with a load of 10 megawatts (mw) could serve its load with two 10 mw generat,ing units, one to supply the load and the other held in reserve. (Wein DJ 587, p. 60; Kampmeier

~

DJ 450, p. 20-21.) .

2.10 The installation of larger units by a system employing the single largest unit down reserve standard increases the amount of reserves required and.thereby increases the cost of electric power supply because of the fixed charges on the reserve endipment which is idle except during emergency periods. Reserves could theoretically be reduced by using several smaller units, for example eleven 1 mw units in lieu of two 10 mw units to supply a 10 mw load. A system with eleven one mw units could lose its largest unit and still supply 10 mw to . its " firm customers." But this system would lose the benefit of ~ the economies of scale available from larger generating units." The system planner must

- compromise between using larger units to obtain scale economies and using smaller units in order to reduce the capital costs of reserves. (Kampmeier DJ 450, pp. 19-24.)

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" 2.11 System loads vary from hour to hour during the day, month and year. " Peaking units" are used to supply loads that occur a few hours a year. " Base load" units supply loads which occur a greater number of hours during the year. Peaking units have relatively lower capacity costs and higher energy costs than base load units. Base load units have relatively high capacity costs (cost per kilowatt), but much lower energy costs (cost per kilowatt hour), both because they can use the lower cost fuels and'because of their greater efficiency in converting these fuels into kilowatt hours of electricity. The economies of scale are much greater' for base load units than for peaking units. In order to operate ef ficiently, a utility must employ a mix of different types of generation (i.e., base load, intermediate and peaking). (Wein Tr. 7307-08; Mozer NRC 205, pp. 63-64, 76-77; DJ 285, pp. 4-6; DJ 511, p . 6 8 ; DJ 557, pp.

4, 9; Masters DJ 567, pp. 57-58; Slemmer Tr. 9138-39;'Schafer Tr. 8602; Williams Tr.

10,381.)

2.12 Although nuclear go.ierating units are used as base load units, they have different operating characteristics and more pronounced economies of scale than fossil fueled units (Wein DJ 587, pp. 49-50, Tr. 7068-69; Lindseth DJ 568, pp. 42-43; Kampmeier DJ 450, p. 51; Mayben Tr. 7815-22; Dempler Tr. 8873, 8877). Utilities have found them financially feasible to install only in large sizes (Kampmeier DJ 450, p. 24; Mozer NRC 205, pp.

68-70; Hughes Tr. 409293; Slemmer Tr. 8995-96; Keck DJ 576, p.

124; Smart Tr. 10,130; DJ 285, pp. 6-10;1C 153).

12

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2."13 Interconnection and coordinated operation and develop-ment are ways in which electric utilities can obtain further economic benefits and increased service reliability, similar to that obtained by merger and acquisition (Kampmeier DJ 450, pp.

9-15; Mayben C 161, p. 16). "Coordinatec operation" includes but is not limited to such activities as interconnection, reserve sharing, transmission services, integration of generating resources, and the exchange or sale of firm power and energy, def'iciency power and energy, emergency power and energy, surplus power and energy, economy power and energy, maintenance power and energy, and' seasonal and diversity power and energy (Kampmeier DJ 450, pp. 10-13; Mayben C 161, p. 17; Sl~emmer App. 121, pp. 8, 15-16), " Coordinated development" includes but is not limited to joint planning and development of generation and transmission facilities (Kampmeier DJ 450, pp. 9, 14-15; Mayben C 161, p. 18 ) .

a. Reserve .Shar ing 2.14 High voltage transmission can make possible the use- of larger units while keeping reserves to a reasonable level -- thus avoiding the dilemma of the single largest unit down standard.

Two or more electric systems can join into an interconnected system through high-voltage transmission. They can then share their reserves and, by making greater use of 'already installed capacity' which formerly had to be held in reserve,, serve more loads than they would have been able to serve operating isolated. (Kampmeier DJ 450, p.11; Schaf fer Tr. 8543 )

2.15 Reserve sharing reduces the cost of producing electric power while increasing the reliability of the participating systems 13 C

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. l (Slemme'r App. 121, pp. 16-17; Masters DJ 567, pp. 29-30; Lindseth DJ 568, pp.- 39-41; Dempler DJ 570, p. 41; Keck DJ 576, p. 8; C 21).

Reserve sharing enables a utility to obtain economies of scale by using large units without maintaining as great a reserve as would be required by an isolate system (Masters DJ 567, pp. 29-32; C 151-52; Slemmer Tr. 9054) With reserve sharing, the economies of scale outweigh the reserve penalties normally paid when very large units are put into service ( DJ 285, pp. 9, 13; DJ 511, pp.

88-59; Masters DJ 567, pp. 29-32; C 29).

2.16 The necessary elements of a reserve sharing arrangement are an agree' ment between two or more utilities as to the minimum amounts of reserves necessary to maintain adequate reliability on their gombined systems and an apportionment of these reserve require-ments among the participants. The arrangement should obligate each participant to supply " emergency power" on an if-and-when-available basis. (Mozer NRC 205, pp. 77-78; Firestone App. 122, pp. 17-19.)

2.17 To demonstrate the practical ef fect of reserve sharing, let us suppose two systems, each having two 10 mw units. Isolated, each could sell only 10 mw of firm power, for a total of 20 mw of firm power from the total 40 mw of generating capacity. Following interconnection, the two systems would need to keep a total of only 10 mw of generation in reserve. If they share the savings equally, each would need to keep only 5 mw in reserve, or 33 1/3 per cent of the 15 mw each could then sell as firm power. An alternative way of accomplishing the same goal would be the merging or consoli-da ting the two or more systems into a single integrated system.

(Kampmeier-DJ 450, pp. 19-21; Firestone App. 122, pp. 17-18.)

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2.id System size and prior coordinating arrangements have a major effect upon the bargaining position of utilities seeking to negotiate reserve sharing arrangements. The value or benefit of reserve sharing is proportionally much greater to a small system than to a larger one or to an already coordinated group of systems (Kampmeier DJ 450, p. 43) . A fair and practical method of striking a bargain is on 'the basis of equal percentage reserves (Kampmeier DJ 450, p. 42). The equal percentage reserve allocation method has*be'en employed in New England for reserve sharing between large (e.g., 3200 mw peak) and small ( e.g . , 68.5 mw peak with a largest single unit of 28.3 mw) utiliti,es (DJ 634, Northeast Utilities System, p. 2 and Boston Edison Company, p. 7; DJ 635, S9; DJ 636, Connecticut Light and Power Company (3ortheast Utilities) and Tauton; DJ 637, p. 371; App. 270', p. 2' Gerber Tr. 11,522) without endangering the viability of either the arrangement for coordination or its participants (Slemmer Tr. 8970-73, 8990). Other pools also use this method (Slemmer Tr. 9105).

2.19 There is no absolutely accurate method for determining the amount or allocation of reserves'(Hug'es h Tr. 4137; Firestone Tr. 9417; Slemmer App. 121, pp. 21-22, Tr. 9059-61, 9100, 9102).

The Applicants collectively employ a method which is a compromise

, of widely divergent standards (Schaffer Tr. 8599; Firestone Tr.

9415; Williams Tr. 10,363-64). There are no uniform industry criteria . requiring the adoption of a method which would burden a small system. For example, where a utility enters generation for the first time, with a single unit, an arrangement can be arrived r

15

, s at wh'ere a second utility provides reserves for the new entrant in return for utilizing the new entrant's surplus power (App. 284, pp. 2-14).

b. Coordinated Development 2.20 Coordinated development means the development of power supply resources by two or more electric utilities on a joint planning basis t'o meet the combined requirements of those utilities.

This practice, like reserve sharing, can permit electric utilities to use larger scale, base load generating units (Kampmeier DJ 450,

p. 14; Mozer NRC 205, pp. 24-25; Slemmer App. 121, p. 29). Coordi-nated development is used to secure the most economic possible pro-gram of expansion for generation and transmission (Masters DJ 567,

p. 28; ,Keck DJ 576, p. 32;- Kampmeier DJ 450, pp. 14-15; Williams Tr. 10,351-52; Hughes Tr. 3727-28).

2.21 With coordinated development of generation and trans-m'ission, two or more utilities can pool their load growth and use larger scale, base load units ef ficiently. Thus, two or more systems with a combined annual loa ~d growth of 800 mw can install an 800 mw generating unit and no idle capacity will be left over that must be paid for. The " lumpiness",of installation of blocks of generating capacity can be conformed more closely to the smoothly rising curve of load growth through coordinated develop-ment. If power supply development is independent, the system planner again must compromise between the economies of scale available from large units and the cost of maintaining idle 16 i

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generating equipment. (Kampmeier DJ 450, pp. 14-16; Mozer NRC 205, pp. 11-13; Williams Tr. 10,351-52.)

2.22 varying arrangements or methods may be used to carry out programs of coordinated development, including joint construction or joint ventures, with equity participation by each of the partici-pants, or sales of " unit power" by contract for the life of the unit. The purchaser under a " unit power" contract is entitled to power from a specific generating unit (or plant) when that unit (or plant) is in operation. Another method is " staggered construc-tion," where one utility builds a unit larger than it needs and markets its temporary surplus and then another takes its turn in adding a large unit. (Kampmeier DJ 450, pp. 14-15; Mayben C-161,

p. 18;.Lindseth DJ 568, pp. 40-41; Mozer NRC 205, pp. 24-27; Slemmer

~

App. 121, pp. 28-31.)

2.23 Coordinated development is not limited to generating resources -- it includes the dev'elopment of transmission systems (Kampmeier DJ 450, pp. 14-15; Mayben C 161, p. 18). The use of transmission to tie generating resources together results in increased economies and reliability (Bingham Tr. 8198). The coor-dinated development of base load generation requires the coordi-nated development of a transmission network (Mozer NRC 205, pp.

14, 17, 18, 24-26; Firestone App. 122, p. 11; Caruso Tr. 10,916-17; DJ 153). -

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2.24 Coordinated development means a one-syr'2m approach to planning, creating the best pattern of transmission facilities, at standardized voltages, without duplication, and with adequate capacity for power deliveries that can cope with various emergen-cies and can take full advantage of diversities among diversified loads and power supply characteristics. It means planning for the optimal regional combination of diverse types of generation.

Fa' c ilities are added in the most economical sequence, using first the plant ' sites and line locations that minimize capital and operating costs and transmission costs and losses, while providing maximum reliability of service. Timing of installations can be staggered to minimize -temporary excess capacity and to enable ,

facil'ities to be fully loaded quickly. (Kampmeier DJ 450, p. 14-15; Mozer "RC 205, pp. 10-18; DJ 285.) Further economies are available from constructing duplicate units at the same plant site (DJ 93; DJ 2 8 5, pp . 10-14 ; DJ ' 511, pp. 89, 133; Schaffer Tr. 8560).

2.25 As in the case of reserve sharing, the small system seeking coordinated development sith a larger system or pool of systems is placed in an unfavorabl'e bargaining position, particu-larly when it lacks other alternatives 5or coordination. This is because the proportional benefit or value of the coordinated development arrangement to the smaller system is greater than its incremental p'roportional value to the large system or the members

-of the large pool, which already enjoy substantial benefits of coordinated development. (Findings 6.13-6.14, 6.23, 7.09, 9.03; Kampmeier DJ 450, p. 43.)

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< .s 2.26 Neither the size of a system's load, the nature or extent of its generating and transmission facilities, nor the

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extent of its participation in specific facilities, makes partici-pation by a small system in a program of coordinated development impractical. For example, it is possible for a municipal system, without generation or transmission, to own a one half megawatt share of an 1180 mw nuclear unit without threatening the viability of coordinated development ( DJ 634-37; Slemmer Tr. 8970-73).

Although'the increment of load growth a small system can bring to a program of coordinated development may not impact the size of a planned un.i t , it will affect the time at which that unit goes into service (Kampmeier DJ 450, p. 26).

2.27 Nuclear generation can only b'e used efficiently in con-junction with the full range of services which comprise coordinated operatio'n and development (Kampmeier DJ 450, pp. 25, 51; Mozer NRC 205, pp. 12, 62; Hughes Tr. 3789-91, 4092-93). A smcIl municipal ,

system without access to coordinated operation and development could not efficiently install or use nuclear generation (Kampmeier DJ 450, p. 25; Mozer NRC 205, p. 8, Tr. 3550-52; Hughes Tr. 4092-93; Mayben C 161, p. 22; Hinchee Tr. 2708; Pandy Tr. 2120; Keck DJ 576, pp. 123-24).

c. Joint Transmission Arrangements (Wheeling) 2.28 A third general category of' coordination may'be achieved by coordinating the operation of transmission facilities used for

-power exchanges and sales. If small systems are f ar apart, the

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cost' of' constructing the intervening transmission may outweigh the savings involved in the coordination of operation and development (Kampmeier DJ 450, p. 32).

2.29 There are generally large economic advantages in utilizing spare capacity in an existing transmission n'etwork rather than constructing duplicating transmission (Mozer NRC 205, pp. 35-37, Tr. 3358). Assume A and B are separated from each other by Y and Z which are the 25th and 26th properties of a single integrated sys' tem that dominates power supply in the entire region around A, B, Y and Z. Use of Y and Z's transmission system on payment of fair costs would be valuable to A and B; it could make coordina-i tion economically feasible for them. Y and Z , however, would already have achieved the advantages of coordinated operation

'nd a development through integration into the dominant system, and that dominant system would probably not find much value in the coordinated development of tran'smission facilities with A and B, even though it obtains a benefit from the sale of surplus trans-mission capacity as a type of coordinated operation.

2.30 Third-party wheeling for small systems may be incorpor-ated in an arrangement for coordinated operation and development without destroying the viability of the coordination arrangement l (NRC 189-90; DJ 63 5, S 13 , pp . 56-57; App. 270, pp. 27-30; slemmer Tr. 8970-73). The economic feasibility of coordination arrangements among small systems and between them and large systems will of ten depend on their ability to obtain wheeling over spare capacity in 20 3

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the transmission system of the dominant integrated utility in an area (Kampmeier DJ 450, pp. 37-38; Mozer NRC 205, p. 37).

The ability'to efficiently utilize bulk power supply options is

, contingent to the availibility of wheeling (Kampmeier DJ 450,

p. 51; Mozer NRC 205, p. 78).

2.31 The e~conomic infeasibility and impracticality of a small system building duplicative transmission f acilities is compounded by ' th~e impact of federal, state and local environmental considera-tions. Applicants' construction of the high voltage transmission grid required in connection with the units which are the subject of this proceeding, together with the existence of excess capacity -

thereon (DJ 358), makes the construction of duplicative, competing transmission even more difficult (Kampmeier DJ 450, p. 38; Mozer NRC 205,' pp. 57-61, 65-68; Tr. 3271, 3356-57; Hughes Tr. 3913-14; Coruso Tr. 10,943, 10,956). .

L-1. In Ohio, no person (including "a political subdivision of the state, or any other entity") may' construct a high' voltage transmission line without demonstrating that the line " represents the minimum adverse environmental impac,t, considering the state of available technology and the nature and economies of the various alternatives . . . " and that the line is " consistent with regional plans for expansion of the electric power grid of the electric systems serving this state . . . ." Ohio Revised Code, SS4906.01, 4906.04, 4906.10. Municipal, as well as private, 1

' electric systems are subject to this requirement. In addition l l

1 21

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to the comprehensive language of this statute, the Supreme Court of Ohio has consistently held that:

[A] city . . . acting in a proprietary capacity . . . has the same duties, obligations, and responsibilities, and also the same rights and powers, as other like proprietors. State ex rel. White v. Cit of Cleveland, 125 Ohio St.

o 4, 25 (1932).

230, 181 N.E.

2 The supplying of electricity by a municipality is an exercise of Travelers Insurance Co. v. Wadsworth, proprietary powers in Ohio.

109 Ohio St. 440, 142 N.E. 900 (1924).

L-2. Similarly, in Pennsylvania the construction of transmis-sion faciliti'es is subject to evnironmental review prior to beginning construction. Commonwealth v. National Gett/sburg Battlefield Tower,_

Inc., 454 Pa. 193, 311 A.2d 588 (1973); Department of Environmental Resources v. Public Utility Commission, 335 A.2d 860 (1975).

66 Municipal systems in Pennsylvania are subject to this review.

P.S. S1122(g).

2. Central _ Area Power Coordination Group 2.32 Applicants are the sole members of the Ceatral Area Power Coordination Group -- the CAPCO Pool (NRC 184; Mozer NRC 205, p. 9).

The original CAPCO Memorandum of Understanding (NRC'184), which was executed in 1967, has been further implemented by the CAPCO Trans-mission Facilities Agreement (NRC 185) and the CAPCO Administratien Agreement (NRC 186); an operating agreement (NRC 202) has been negotiated but has not yet reached a final version (NRC 202, p. 40; Smart Tr. 10,103). The CAPCO Pool was formed in order to secure 22

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the Applicants the economies of scale and increased reliability

~

available through coordinated operation' and development of gener-ation and transmission facilities (NRC 194, p.1; Firestone App.

122, pp. 9-10; Fleger Tr. 8617; Dempler DJ 570, p. 48; Schaffer Tr. 8537, 8600; Williams Tr. 10,351-52, 10,368-69; Mozer NRC 205, p.10; Hughes Tr. 3639; NRC 6; NRC 157, TE Annual Report, p. 14; NRC 169, p. 1123; DJ 153 , p . 10 ; DJ 511, p. 1).

2.33 To achieve these objectives, the CAPCO Pool plans, con-structs,and operates generation and transmission facilities on a "one system" basis (Firestone App. 122, pp. 10-12; Williams Tr.

10,357; Schafer Tr. 8535; Mozer NRC 205, pp. 10-18; Hughes Tr.

3639, 3751-52; Masters DJ 567,'pp. 27-36). CAPCO generation is predominantly nuclear ( DJ 95 ; DJ 285, p. 4; Schaffer Tr. 8539-41).

2;34 Applicants, as members of CAPCO, engage in reserve sharing .with each other (NRC 184, SS4.1-4.2, 5.1; NRC 202, Art.

5, 6; Firestone App. 122, p. 12; Fleger Tr. 8617; Schaffer 8537, 8542-43; Mozer NRC 205, p. 23; Hughes Tr. 3639), as well as coor-

, dinated maintenance (Fleger Tr. 8617; Dempler Tr. 8674-75; Schaffer Tr. 8547-49; Mozer NRC 205, p. 21; Hughes Tr. 3639).

2.35 Applicants, as members of CAPCO, wheel power for each other (NRC 184, p. 18; NRC 165, Art. 1; Mozer NRC 205, pp. 33-35; Rudolph DJ 558, pp. 213-14; Masters DJ 567, pp. 44-45; Sullivan DJ 578, pp. 238-40; DJ 588), both over joint facilities- (i . '. ,

"CAPCO transmission") (Mozer NRC 205, pp.- 33-35; Firestone App. .

122,'p. 11; Schaffer Tr. Tr. 8552, 8580-82, 8604-06) and over the 23 e

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Applicant's individually owned facilities (NRC 185, Art. 5; Mozer NRC 205, pp. 33-35; Firestone App. 122, p. 15; Schaffer Tr. 8552; Arthur Tr. 8380). Applicants also engage in coordinated operation with utilities outside the CCCT (Mozer NRC 205, pp. 24~, 27-35, 37-46, Exhibits HMM-4, 7, 8; Masters DJ 467,'pp. 116-19). The availability of transmission service in CAPCO allows each member of the Pool to engage in any advantageous transaction with non-CAPCO systems, even though the CAPCO member may not be directly intercon-nected with the non-CAPCO system. Thus, DL can secure energy from Consumers Power Company by utilizing TE's interconnectnion with Consumers, together with the CAPCO transmission operated by TE and

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OE (Masters DJ 567, pp. 44-45; Fredrickson DJ 573, pp. 177-78; Mozer NRC 205, pp. 33-35;'Hughes Tr. 3690-91; NRC 224.)

2.36 Applicants, individually, also provide transmission services (Masters DJ 567, pp. 37-38, 42-43; Lindseth DJ 568, p. 25; Fredrickson DJ 573, pp.177-78; Mansfield DJ 572, p. 132; Keck DJ 576, pp. 105-06; Kozak DJ 579, pp.16-19; Moran DJ 583, p. 13; DJ 135, pp. 1-10; DJ 136, pp. 3-4; DJ 137; DJ 167, pp. 3-6; DJ 508, pp. 1-6, 17-18 ; DJ 507, pp. 1-90, 129-35 ; NRC 205 Mozer, pp. 31-43, Exhibits HMM-4, 7) and receive such service f rom others (Masters DJ 567, pp. 37-38, 42-43; Keck DJ 576, p. 103; Sullivan DJ 578, pp. 150-52; Dempler Tr. 8860-61; DJ 135, pp. 12-19; DJ 137; DJ 167, pp. 6-8; DJ 507, pp.91-119; DJ 508, pp. 9-14; Mozer NRC 205, pp.

31-43, Exhibits HMM-4, 7).

2.37 CAPCO engages in a number of other complex power trans-actions:

s 24 l

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t

.-~ (a) Limited Term Power: capacity and energy reserved for periods normally covering a month or more. This has two variations -- that which is deliver.ed from the suppliers' entire system and that which is a power entitlement from a specific unit (unit power).

(b) Short Term Power: capacity and energy reserved for periods of a week or more.

(c) Spinning Reserve Service: unloaded generating capability available upon demand. (This is provided -

under the Interchange Capacity Energy Schedule.)

'(d) Emergency Service:

capacity and energy supplied in the event of breakdwon or other emergency in the receiving party's system.

(e) Scheduled Maintenance Power: energy supply in connection with scheduled ma'intenance, repair or over-hauling of generating equipment.

(f) Economic Service: energy supplied by mutual agreement whenever a savings in operating costs may be realized by displacement of'the receiver's source of energy by the supplier's source. ,

The CAPCO Pool has made provision for the exchange of economy capacity as well as economy energy. .

(g) Interchange Capacity and Energy: capacity and/or energy available at the supplying party's discretion, when other service schedules do not apply.

25

, o f

i g

{

(h) Payment-in-Kind: an acceptable means of payment for certain transactions between members.

. (Wein DJ 587, pp. 106-07; DJ 588).

The CAPCO agreements also provide for other types of coordinated activity (Mozer NRC 205, pp. 20-23) and the Applicants individually engage in coordination with private utilities and industrial firms which generate electric power (Mozer NRC 205, pp. 20-23; NRC 158, DL-St. Joseph Lead Co. contract, TE-Interlake, Inc. contract, answer 8 by each Applicant; DJ 153, p. 9; DJ 511, p. 59; Dempler Tr. 8679-80, 8710; Moran Tr. 9944).

2.38 As the CAPCO members freely admit, their program of interconnection and coordinated operation and development enables each member to avail itself of the greatest reliability and the largest economies of scale in both generation and transmission (Masters.DJ 567, p. 36; Schaffer Tr. 8537; White Tr. 9712; Williams Tr. 10,369-70; Firestone DJ 575, p. 43.-) These are economies and reliability which they could not obtain individually (Mozer NRC 205, pp. 11-12, Tr. 3269-70; Hughes Tr. 3639; Masters DJ 567, pp. 32, 57-68; Firestone DJ 575, p. 43, Tr. 9228; Keck DJ 576,

p. 32; Sullivan DJ 578, p. 27 Williams Tr. 10,351-52; Schaffer Tr. 8537; DJ 511, p. 304722; NRC 157, T5 Annual Report, p. 3; C 151).

2.39 It is possible for a viable pool to consist of a large number of systems of widely varying size with significant dispar-ities in the nature and extent of facilities, and engage in a

. 26 Y

o y.

• program of coordinated operation and development which brings significant benefits to all e the participants (DJ 634-37; Slemmer Tr. 8964, 8968, 8970-74, 8978-81, 9049, 9051, 9073-74, 9108, 9128-29, 9162; Ge' .. Tr. 11,508,.11,511-31; Kampmeier DJ 450, pp. 25-30, Tr. 5829-31).

2.40 Absent access to the benefits of cordinated operation and development enjoyed by the members of CAPCO, small systems in the Combined CAPCO Companies Territory ("CCCT") cannot remain competitively viable (Kampmeier DJ 450, pp. 41, 52; Wein DJ 587,

p. 144; Schwalbert DJ 577, p. 19; App. 120).

2.41 The fact th'at Applicants sell bulk power at wholesale pursuant to rates approved by regulatory agencies does not ensure

• that the benefits of coordinated operation and' development which Applicants enjoy will be proportionately enjoyed by their wholesale customers (Findings 3.01-3.02, 8.26-8.28, 9.25).

L-3. Both the Federal Power Commision, which has authority to approve wholesale rates and c -ntracts, and the cour ts have long held that there is no singl'e , correc t , cost-recovering rate, rather there is a " zone of reasonableness" into which a rate must fall in order to be approved. Federal Power Commission v. Conway Corp., 44 U.S.L.W. 4777, 4779 (1976); Montana-Dakota Utilities Co. v. Northwestern Public Service Co., 341 U.S. 246, 251 (1951);

Otter Tail Power Co., 2 F.P.C. 134, 149 (1940).

27 e

l C. COMPETITION IN THE ELECTRIC POWER INDUSTRY

~

1. Generally 3.01 It is well recognized that cocaetition plays as important a role in regulated industries as it does in those which are entirely subject to the forces of the market place (Wein DJ 587, pp. 16-17, 19-21, 44, 165-72; Kampmeier Tr. 5822-23; Hughes NRC 207,. pp. 36-37, 40). Coapetition is clearly economically possible in regulated industries and can be of great value in helping to achieve the ver,y goals for which regulatory agencies were estab-lished by Congress and the States (hein, DJ 587, pp. 16-17, 19-21, 44; Kampmeier Tr. 5822-23). Competition can provide a stimulus to ef ficiency and innovation that no regulator can mandate (Wein DJ 587, pp. 165-67; Hughea NRC 207, pp. 36-40). Indeed, some regulators do not make any attempt to examine the efficiency of the companies subject to their authority (Wilson Tr. 11,029-31),

3.02 A regulatory agency is most of ten in the position of arbiter for those conflicting interests which are brought before it (Wein DJ 587, p. 168). No regulatory staff con supervise or regulate every aspect of the regulated business (Wein DJ 587, pp.

~

168-69; Kampmeier Tr. 5980; Hughes Tr. 3753-54; Wilson Tr. 11,029-31, 11,119). Neither is indirect customer pressure adequate; customers generally canno't afford the protracted litigation which regulatory hearings entail (Wein DJ 587, p. 169; DJ 171; DJ 254; McCabe Tr.

1718; Luxenberg Tr. 6441-42). Moreover, regulatory relief may be limited in nature and scope (Wein DJ.587, pp. 165-72; Hughes NRC 207, pp. 8, 37, 44; Tr. 3716-19, 3724-25, 3935, 4017).

28

. . 9

, ,s .

L-4. The Courts have recognized that competition and antitrust

~

principles have an important role in making regulation effective in the electric power ind us tr y. Otter Tail Power Co. v. United States, 410 U.S. 366 (1973); Gulf States Utilities v. Federal Power Commission, 411 U.S. 747 (1973); Federal Power Commission

v. Conway Corp., 44 U.S.L.W. 4777 (1976). The fact that an elec-tric utility is subject to federal or state regulation and is required to adhere to the tariffs it has promulgated does not exempt it from the operation of the antitrust laws. Otter Tail, supra; Cantor v. Detroit Edison Co., 44 U.S.L.W. 5357 (1976).

Speaking of another highly regulated industry, the Supreme Court established 'a principle which is easily applied to electric utilities: "The fact that banking is a highly regulated industry critical to the Nation's welfare makes the play of competition not less important but more so." United States v. Philadelphia National Bank, 374 U.S. 321, 372 (1963). .

2. Sale of Firm Power at Wholesale 3.03 Electric distribution systems, whether possessing only

, distribution facilities or as part of a vertically integrated utility, require a source of firm bulk power (Kampmeier DJ 450, pp. 37, 40).

3.04 Those distribution systems have two basic alternative a means of obtaining their firm bulk power supply: they may buy their firm power at wholesale from another electric system that engages in the business of producing firm power for sale or they 29 1

)

may th'emselves produce firm power if it is economically feasible to do so - (Kampmeier ~ DJ 450, pp. 31-32, 37; Mozer NRC 205, p. 49).

A system should not be forced to choose one of these alternatives to the exclusion of the other; where a partial requirements firm power option is available, a system may generate a portion of its firm power requirements ar.J purchase the rest (Mozer NRC 205, pp.

71, 74, 78). With access to the benefits of coordinated operation and development, a system has the ability to choose the bulk power supply alternative, or mix of alternatives, which it believes to be most economic and efficient (Kampmeier D'J 450, pp. 16-17, Tr.

5867-70; Hughes Tr. 3847-48).

3.05 One element of competition in the electric power industry is the sale of firm power at wholesale 'to distribution systems (Kampmeier DJ 450, p. 40). Wholesale power is firm power delivered in bulk, i.e., at high voltages (compared to the voltages most

':etail customers can use) , and to relatively large loads.

The larger the load, the more economical it is to deliver power at a higher voltage (Wein DJ 587, p. 98).

3.06 The supplying of firm power at wholesale in the Applicants '

respective service areas may be divided into two categories: the requirements of distribution systems operated by municipalities and cooperatives (" independent" loads) and "in-house" requirements of the distribution systems operated by 'the Applicants themselves

(" captive" loads). With a " captive" load, the wholesale function is performed by a single vertically integrated utility, which gen-erates, transmits and distributes power to the ultimate retail user; 30 1

• I

.  ?

with an " independent" load, bulk power is sold by the generating and transmitting company to an independent utility which, in turn ,

performs the function of breaking bulk and selling at retail to u1~timate users. (Wein DJ 587, pp. 98, 131.) There is no direct competition at the wholesale level for " captive" loads, but compe-tition is possible in the sale of firm power at wholesale to meet the bulk power requirements of municipal and cooperative systems (Wein DJ 587, p. 132; Kampmeier DJ 450,*pp, 32, 40).

3.07 Any utility may compete as a seller of bulk power at wholesale if it has a low-cost bulk power supply and has a trans-mission capability which allows it to deliver that power to a wholesale purchaser; such a capability may exist either by virtue of the direct ownership of transmission facilities by the selling utility, or by acces,s to the transmission facilities of others (Kampmeier DJ 450, pp. 31-32, 37-41). Thus, any private, coope,r-ative or municipal system which possesses these two characteristics can compete in the sale of wholesale firm power.

L-5. There are no legal or , statutory barriers to wholesale competition. There is no federal . statute or regulatory pronouncement prohibiting such competition. As the Supreme Court said in Otter Tail Power Co. v. United States, 410 U.S. 366, 374 (1972):

. . . The history of Part II of the Federal Power Act indicates an overriding policy of maintaining competition to 'the maximum extent possible consistent with the public interest.

L-6. The States of Ohio and Pennsylvania are without authority to raise barriers to wnolesale competition. The Supreme Court, in i

31 e

e

5 Public Utilities Commission v. Attleboro_ Steam & Electric Co. ,

273 U.S. 83 (1927), "placed the interstate wholesale transactions of the electric utilities entirely beyond the reach of the states."

S. Rep. No. 621, 74 th Cong . , 1st Sess , 17 (1935); see also H. Rep.

No. 1318, 74th Cong., 1st Sess. 7-8, 27 (1935). It was to fill the jurisdictional gap resulting from Attleboro that Congress passed the Federal Power Act in 1935. As the Supreme Court subsequently stated, "[w] hat Congress did was to adopt the test developed in the Attleboro line which denied state power to regulate a sale 'at wholesale to local distributing companies' and allowed state regu-lation of a sale at ' local retail rates' to ultimate consumers. '"

Federal Power Commission v. Southern California Edison Co., 376 U.S. 205, 214 (1964); see also Illinois Natural Gas Co. v. Central Illinois Public Service Co., 314 .U.S. 4'9 8 , 504 (1942). Under the Supremacy Clause of the Constitution, state legislation and state .

regulatory policy cannot restrict the intended effect of valid federal legislation. E.g., Nash v. Florida Industrial Commission, 339 U.S. 235 (1967); Sperry v. Florida, 373 U.S. 379 (1963);

Free v. Bland, 369 U.S. 663 (1962).

3. Sale of Power At Retail 3.08 Retail competition is competition for the loads of the ultimate consumers of electric power. It is generally divided into residential, commercial and industrial retail sales. All retail 32 L .

9 sales, with one limited exception, 3/ are sales of firm power.

(Wein DJ 587, p. 97.)

3.09 Competition for retail customers exists between two distribution systems wherever one system is in a position to serve the retail customer (s) of another .or wherever two or more of these systems are in a position to serve a new retail customer.

This. competition takes two principal forms -- competition for the franchise or opportunity of serving " blocks" of retail customers on a de facto exclusive basis, and competition for individual retail customers, either residential, commercial, or industrial, at the boundary or in overlapping portions of the service areas of two or more distribution systems. Two utilities may be in a position to compete for the franchise or privilege of providing electric service to a municipality, or the municipality itself may wish to compete by condemning the previously franchised utility's f acilities 4/ and providing its own electric service (DJ 200, Attachments 5, Sa, 6, 7 (rejected), 8, 9 (rejected);

Wein DJ 587, pp. 117-28, Tr. 6944-47, 6958-59).

3/ Certain industrial customers purchase interruptible power at retail (Wein DJ 587, p. 97). Of the Applicants, only DL appears to have a filed tariff offering interruptible power (NRC 161; NRC 163; NRC 165; NRC 167; NRC 169, p. 414). There are no filed rate schedules for interruptible service to residential or commercial customers in the CCCT (Wein Tr. 7186).

4/ Municipal utilities in both' Ohio and Pennsylvania may exercise the power of eminent domain in order to provide electric service to their residents. 53 P.S. 5S314, 46501; Ohio Constitution, Article XVIII, S4.

1 I

33 1 1

I

. .l i

i

,3.10 State statutes in both Ohio and Pennsylvania prevent actual and potential competition between investor-owned utilities, on the one nand, and other investor-owned or cooperative utilities, on the other hand, for both blocks of customers and individual retail customers, except under very limited . circumstances (Wein DJ 587, pp. 115-17, 123-24 ) .

L-7. In Pennsylvania, the State has promulgated a plan cer-tificating specifically defined retail service areas to private utilitie's and cooperatives thereby eliminating any possibility of competition for either new or existing retail customers. Act No. 57, Session of 1975 (July 30, 1975).

L-8. Ohio law prohibits the switching of existing retail customers of one private utility to another private utility or, arguably, to a cooperative for a period of 90 days af ter discon-necting from the former supplier. Ohio Revised Code, Section 4905.261. To avoid the prohibitions of' the law, exceptional circumstances would have to be shown, or the two utilities would have to agree to the switch.

L-9. There is no legal barrier to either actual or potential competition between private and municipal (whether self generating or possessing only distribution facilities) utilities for new or existing retail customers in either Ohio or Pennsylvania. Municipal utilities in Ohio may sell unlimited amounts of power within the municipality and may sell an amount outside the municipality equal to 50 per cent of the amount supplied within. Ohio Constitution, 34

.  ?

~~- - - - - - - - - _

e .r .

Art. XVIII, S6. Pennsylvania utilities are not subject to any limitation on the amount of power they may sell, but all retu'l sales outside the municipality are subject to regulatian by the State. 66 P.S. Sll22(g).

II. THE SITUATION. INCONSISTENT WITH THE ANTITRUST LAWS A. THE STANDARD OF SECTION 105c

/

L-10. The Nuclear Regulatory Commission and, by delegation, this Licensing Board is required to determine "whether the activities under the license (s) would create or maintain a situation inconsistent with the antitrust laws." Section 105c, Atomic Energy Act of 1954, 42 U.S.C. S2135c.

,1. The Situation L-ll. The language of the statute is clear; it is a situation which is the focus of the inquiry. A situation is, by definition, a state or condition at a given point in time -- as opposed to specific anticompetitive conduct.

It is the competitive " situation" as a whole (with an emphasis on the structure of the market, as the word " situation" clearly suggests), not par ticular individual parts thereof, which we must measure.

Alabama Power Company (Joseph M. Farley Nuclear. Plant, Units 1 ano 2)7 L8P-73-5, RAI-73-2, 85, 86 (1973).

A situation under Section 105c is not limited to a specific anti-competitive act, rather it may be comprised of " patterns of anti- +

competitive conduct." Kansas __ Gas and Electric Company and Kansas -

City Power and Light Company (Wolf Creek Generating Station, Unit No. 1), ALAB-279, 1 N.R.C.I. 559, 572 (1975).

35

2 The Standard of " Inconsistency" L-12 Section 105(c) prohibits the licensing of nuclear power facilities where the activities under such licenses would create or maintain a situation inconsistent with the antitrust laws. The test is inconsistency with the antitrust laws, not violation of those laws. Certainty of contravention of' the antitrust laws is not required, and finding of inconsistency may be based on the contravention of policies underlying the antitrust laws. S. Rep.

- No. 91-1247, 91st Cong., 2d Sess. (1970); H.R. Rep. No. 91-1470, 91st'Cong., 2d Sess., 14 (1970). The level of proof which is therefore required to show inconsistency with the antitrust laws is less than what would be required to establish violations of those laws in the courts.

L-13. The Supreme Court, in' Northern Pacific Railroad v.

United States, 356 U.S. 1 (1958), set for th the principles under- '

lying the Sherman Act, and it is against this national commitment to the maintenance of unfettered competition that the consistency or inconsistency of the situation in Applicants' area must be raeasur ed .

The Sherman Act was designed to be a comprehensive charter of economic liberty aimed.at preserving free and unfettered competition as the rule of trade.

It rests on the premise that the unrestrained inter-action of competitive forces will yield the best allocation of our economic resources, the lowest prices, the highest quality and greatest material progress, while at the same time providing an environment conducive to the preservation of our democratic, political and social institutions. But even were that premise open to question, the policy

• uneauivocally laid down by the Act is competition!'

36

i

• ^

, y An'd to this end it prohibits 'Every contract, com-bination . . . or conspiracy in. restraint of trade or commerce among the several States. ' 356 U.S. at 4 and 5. (Emphasis added).

L-14 Even conduct by Applicants which fails to rise to the

. level of a violation of the antitrust laws may nevertheless support a finding that there is a situation existing which is inconsistent with the antitrust laws. Indeed, when exclusionary condi;ct of any nature is found together with a high degree of market concentration -- the prevention of which is a goal of the antitrust. laws, United States v. Philadelphia National Bank, 374 U.S. 321, 363, 371 (1963) -- such an inconsistency becomes manifest.

B. THE ANTITRUST LA$S AND THE POLICIES UNDERLYING THOSE LAWS

• I Clearly, agreements cr conspiracies which ' constitute per se violations of the antitrust laws give rise to a " situation incon-sistent with the antitrust laws." In addition, cases concerning monopolization under Section 2 of the Sherman Act, 15 U.S.C. S2, delineate a variety of practices, many 'off which are not per se illegal, but which have been condemned as exclusionary when practiced by persons possessing or attempting to acquire monopoly power.

1. Agreements and Conspiracies in Restraint of Trade s

L-15. Section 1.of the Sherman Act, 15 U.S.C. S1, provides in pertinent part:

(

Every contract, combination in the form of trust

~

l or otherwise, or conspiracy, in restraint of trade l j- or commerce among the several States, or with l

1. oreign nations, is declared to be illegal . . . . '< u. .:

l 37 '

', a. Co'nspiracy Under the Sherman Act L-16. A conspiracy was defined by the Supreme Court in Pettibone v. United States, 148 U.S. 197, 203 (1893) as:

. . . a combination of two or more persons, by concerted action, to accomplish a criminal or unlawful purpose, or some purpose not in itself criminal or unlawful, by criminal or unlawful means. . . .

Under the Sherman Act, the agreement is the gist of the offense.

That is, the agreement itself constitutes the complete violation; no overt acts in furtherance of the conspiracy need be alleged or proved. . United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 224-25, n. 59 (1940); United States v. Trenton Potteries Co., 273 U.S. 392, 402 (1927); tashJ 'v. United States, 229 U.S. 373, 378 (1913). Moreover, since no overt act need be shown, it is no defense in an antitrust conspiracy case that the enforcement of the illegal agreement was inconsistent or ineffective, Ethyl Gasoline Corp. v. United States, 309 U.S. 436, 458 (1940), or -

evet. that no steps were taken to carry .out the illegal agreement, United States v. Central States Theatres Corg., 187 F. Supp. 114 (D. Neb. 1960). On the other hand, . proof concerning the accom-plishment of the objectives of a conspiracy may be persuasive evidence of the existence of the conspiracy itself. American Tobacco Co. v. United States, 328 U.S.~781, 609 (1946); Eastern States Retail Lumber Dealers Ass'n v. United States, 234 U.S.

600, 612 (1914).

L-17. Although the essence of the offense is the agreement, it does not have to be a formal agreement but may in f act consist 38 1

I e

O

i I .b of little more than shared expectations of conduct by persons with a common objective. American Tobacco Co. v. United States, 328 U.S. at 809; United States v. Masonite Corp., 316 U.S. 265, 275 (1942); Interstate Circuit v. United States, 306 U.S. 208, 227 (1939). No exchange of words is required. Frey & Son, Inc. v.

Cudahy Packing Co., 256 U.S. 208, 210 (1921). The agreement may be built up bit by bit over time without consultation among the conspirators. American Tobacco Co. v. United States, 328 U.S.

at 809-810; United States v. Masonite Corp., 316 U.S. at 275; Interstate Circuit v. United States, 306 U.S. at 227.

L-18. In American Tobacco Co. v. United States, 147 F.2d 93, 107 (6th Cir. 1944), aff'd, 328 U.S. 781 (1946), the Court of Appeals noted:

No formal agreement is necessary tc constitute an unlawful conspiracy. Almost always, the crime is a matter of inference, deduced from the acts of the persons accused, which are done in pursuance 01 an apparent criminal purpose. The agreement may be shown by a concert of action, all the parties working together understandingly, with a single design for the accomplishment of a common purpose. It is the common design which is the essence of the conspiracy or combination; and this may be made to appear when the parties steadily pursue the same object. (Citations omitted.) .

L-19. The conspiracy must be viewed as a whole. United States

v. Patten, 226 U.S. 525, 544 (1913). Lines of prool may interweave and support each other and "yholly innocent acts" may be "part of the. sum of the acts" which make up an illegal conspiracy. United States v. American_ Tobacco Co., 147 F.2d 93, 107 (6th Cir. 1944),

aff'd, 328 U.S. 781 (1946); Schine Theatres v. United States, 334 39 .

F

U.S.- 10, 119 (1948); Swift & Co. v. United States, 196 U.S. 375, 396 (1905).

L-20. Once the existence of an agreement or conspiracy has been established, only slight additional evidence is necessary to connect any particular party to it. Hernandez v. United States, 300 F.2d 114, 121-22 ( 9 th Ci r . 1972 ) . 5/ For example, if it is found tnat any party was present at any meeting "while the criminal scheme was being formed, [such evidence] goes far beyond the min.imum evidentiary requirements in conspiracy cases." United States v. Ward Baking Co., 224 F. Supp. 66, 70 (E.D. Pa. 1963).

L-21. Circumstantial evidence alone may " connect" a defendant.

Justice Sutherland, speaking for the court in United States v. -

Manton, 107 F.2d 834, 839 (2d Cir. 1938'), stated tha t : '

It is not necessary that the participation of the accused should be shown by direct evidence.

The connection may be inferred f rom such f acts and circumstances in evidence as legitimately tend to sustain that inference. Indeed, often if not generally, direct proof of criminal con-spiracy is not available and it will be disclosed only by a development and collocation of circum-stances.

L-22 In Hitchman Coal & Coke Co. v. Mitchell, 245 U.S. 229 (1917), the Supreme Court clarified the rule of what is required to connect as follows:

5/ See, e.g., United States v. McGann, 431 F.2d 1104 (5th Cir.),

cert, denied, 401 U.S. pl9 (1970); Fox v. United States, 381 F.2d 1257 129 (9th Cir. 1967) [and cases cited tnerein]; Morton Salt Co. v. United States, 235 F.2d 573, 580 -(10 th Cir . 1956); Nye &

fJissen v. United Stitee, 168 F.2d 846, 852 (9th Cir. 1948)7 all'd, JJb U.S. 6T3 tis 4sI; Luteran v. United States, 93 F.2d 395, 398

( 8 th Ci r . 193 7 ) , ce-t! denied, 363 U.S. 644 (1938); Riss & Co. v.

Association of American Nailroads, 187 F. Supp. 306, 313 (D.D.C.

19 GUT 7 TG7+5 on otHUY orounos, 299 F.2d 133 (D.C. Cir.),. cert

• denied, J76 UT3.~il 7(1967J7-40 9

i In order that the declarations and conduct of third parties may be admissible in such a case, it is necessary to show by independent evidence that there was a combination between them and defendants, but it is not necessary to show by independent evidence that the combination was criminal or otherwise unlawful. The element of illegality may be shown by the declarations themselves. 245 U.S. at 249. See,also, United States v. Costello, 352 F.2d 848, 853 n.2 (2d Cir. 1965).

L-23. Any act, statement or declaration of one conspirator in furtherance of the conspiracy and during its pendency is admissible against each co-conspirator, provided the latter is

" connected" to the coUspiracy. Delli Paoli v. United States, 352 U.S. 232, 237 (1957); United States v. Gypsum Co., 333 U.S. 364, 388-389 (1948). This rule not only permits the admission into evidence of what woul'd otherwise be hearsay statements, but also

• permits substantive liability to be imputed to' one conspirator f rom the acts or declarations of another. Hitchman Coal & Coke Co. v. Mitchell, 245 U.S. 229 (1917).

L-24. Normally a conspiracy is not presumed to have ended simply because an important overt act 'in furtherance of it is -

accomplished. United States v. Kissel, 218 U.S. 601, 609 (1910);

United States v. Hyde, 225 U.S. 347, 369 (1912). Once the con-spiracy is estaSlished, it is presumedIto continue until the contrary is shown. United S tates v. S tromberg , 268 F.2d 256, 263 (2d Cir. 1959), cert. denied, 361 U.S. 863 (1959); United States v. Per1 stein, 126 F.2d 789 (3d Cir. 1942).

b. Per Se Violations L-25. The Supreme Court has found that certain types of

~

agreements and conspiracies are per se violations of Section 1-

-41 s

.-, y

n, .

of t,hs ,Sherman Act. This condemnation includes those practices

. . . which because of their pernicious effect on competition and lack of any redeeming virtue are conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the pr.ecise harm they have caused or the business excuse for their use. Northern Pacific Ry. v.

United States, 356 U.S. 1, 5 (1958). ,

L-26. A specific intent to restrain trade is therefore not an element of a.per se offense. What the conspirators intended is not relevant or material if the object of the conspiracy makes it.a per se violation of the Sherman Act. As the Supreme Court said in United States v. Reading Co., 226 U.S. 324, 370 (1912):

Of course, if the necessary result is materially to restrain trade between the States, the intent with which the thing is done is of no consequence. .

Similarly, a per se violation cannot be excused or justified

.because the conduct effectuating the conspiracy is reasonable or because the conspiracy was motivated by good intentions, business necessity, or a desire to bene' fit the public. Ethyl Gasoline Corp. v. United States, 309 U.S. 436, 461 (1940);

Standard Sanitary Manufacturing Corp. v. United States, 226 U.S.

20, 49 (1912).

L-27. " Price fixing" encompasses any arrangement, tacit understanding or concert of action, designed to raise , depress ,

fix, peg, or. stabliize rates or prices. United States v. Socony Vacuum Oil Co., 310 U.S. 150, 221 (1940). Such an agreement or conspiracy has long been held to be a par se violation of the Sherman Act, Socony Vacuum, 310 U.S. at 226, n. 59; United 42 l

k t- .

States v. Trenton Potteries Co. , 273 U.S. 392, 397-98 (1927),

~

even where the rates involved are held to be reasonable by the

- regulatory agency having jurisdiction, Georgia v. Pennsylvania Railroad Co., 324 U.S. 439 (1944).

L-28. Territorial and-customer market allocations among com-petitors, whether by agreement or conspiracy, are also per se violalations of the Sherman Act. Otter Tail, 410 U.S. at 378; United States v. Topco Associates, 405 U.S. 596, 608 (1972).

{ L-29. In Klors,Inc. v. Broadway Hale Stores, Inc. , 359 U.S. ,

1 207, 212 (1959), the Supreme Court stated, with respect to another E81 se offense, that "(g] roup boycotts, or concerted refusals by traders to deal with oth'r traders, 'have long been held to ,

- be in the forbidden category." The Licensing Board in Consumers

• Power Co. (Midland Units 1 & 2), LBP-75-39, 2 N.R.C.I. 29 (1975),

correctly applied the holding of the Klors case to the electrical

- industry when it stated: -

j' If two utilities enter into a coordination arrangement thereby reaping the benefits of such arrangement and further conspire to prevent other j utilities from entering the coordination arrange-ment with the intent to injure such other utilities, such conspiracy falls squarely within the prohibi-

?

tion of Section 1 of the Sherman Act. 2 N.R.C.I.

at 74. .

L-30 More recently, the Supreme Court in United States v.

Arnold, Schwinn and Co.,-388 U.S. 365 (1967), found restraints upon -alienation to be violative of Section 1:

Under the Sherman Act, it is unreasonable with-out more for a manufacturer to seek to restrict and confine areas or persons with which *an article may be' traded af ter the manufacturer has -parted with dominion over it. 3dd U.S. a t 3 79 ~. '

f 43 b

w- m ,w-, e -v.. e o e>r -

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y -g-po,we,.y n-a. ---w-e- p,--rw ,

f ,

• 2 .* The Law of Monopolization L-31. Section 2 of the Sherman Act, 15 U.S.C. S2, reads as follows:

E'very person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several states or with foreign nations, shall be deemed guilty of a felony . . . .

L-32. The offense of monopolization consists of monopoly power in the relevant market -- in economic terms, the power to fix' prices or to exclude competition -- coupled with policies or conduct designed to acquire or preserve that market power. Thus, the Supreme Court held that ,

the material consideration in determinating whether a monopoly exists is not that prices are raised a,nd that competition actually is excluded but that power e'xists to raise prices or to exclude competition when it is desired to do so. American Tobacco v. United States, 328 U.S. 781, 811 (1946).

More recently, the Court stated in United States v. Grinnell Corp. ,

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

. The offense of monopoly under S2 of the Sherman A ct, has two elements: (1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distin-guished from the growth or development of a superior product, business acumen or histor,1c accident.

L-33. The first element of the offense, possession of monopoly

. power in a televant market, can be inferred "from [a} predominant share of the market," see Grinnell, 384 U.S. at 571, or from control over a " bottleneck" f acility which affords the controlling company the power to exclude competition or set prices. See United States v. Otter Tail Power Company. 331 F. Supp. 54, 61 (D. Minn.

1971), aff'd in part, 410 U.S. 366, 371 (1973).

44 y  %

}

L-34. Once it is established that a company possesses monopoly power, that company's conduct in the market place is judged by a different, stricter standard: it cannot willfully act to maintain or expand that power without violating the antitrust laws. The willful maintenance of monopoly power can bd established merely by showing that " transactions neutral on their face" have an exclusionary effect on the market, without a specific showing of anticompetitive motivation. See United States v. Aluminum Company of America, 148 F.2d 416', 432 (2d Cir. 1945); 6/ United States v. United Shoe Machinery Corp.,

110 F. Supp. 295, 346 J(D. Mass. 1953), aff'd per curiam, 347 U.S. 521 (1954). -

L-35. That a monopo'ly results from a defendant's conduct j is sufficient for a finding of monopolistic intent. United States v. Griffith, 334 U.S. 100, 105-106 (1948). The existence of a business motivation or justification cannot legitimate ,

the misuse of monopoly power. United States v. Arnold, Schwinn

& Co., 388 U.S. 365, 375 (1967); Otter Tail Power Co. v.

United States, 410 U.S. 366, 380 (1973). None of the transactions engaged. in by a defendant need be illegal in and of themselves if they are part of a course of conduct which maintains a monopoly.

See American Tobacco v. United States,. supra; Aluminum Company of America; 148 F.2d at 431-32; United Shoe, 110 F. Supp. at 342. It follows, therefore, that individual elements of an 6/ This case was very much in the minds. of tne framers of the 1954

, Atomic Energy Act. Joint Committee on Atomic Energy, Hearings on

• S. 3323 and H.R. 8862 to Amend _the Atomig_ Energy _Act of 1946, 83rd Cong., 26 Sess., Part 2, at 441-443, 495-498, 629, 6sI!?T2 T1954).

45 i

99 4

c anticompetitive situation may not be singled out for evaluation on a' piece-by-piece basis; for a group o.f activities, each perhaps lawful standing alone, may comprise a monopolization in violation of the antitrust laws. See United States v. International Business Machines, 19'75 CCH Trade Cases 160,495 (S.D.N.Y. 1975)..

L-36. Section 2 of the Sherman Act also prohibits conspiracies and combinations to monopolize. American Tobacco Co. v. United States, 147 F.2d 93, 111 (6th Cir. 1944), aff'd, 328 U.S. 781 (1946).

A combination or conspiracy to monopolize would include an agreement or und'erstanding which was intended to, or by its inherent nature would, control prices or exclude competitors in any relevant mar-ket. 7/ It is not necessary th.at the agreet it was intended to, or by its inherent nature would, exclude all possible competition.

American Tobacco v. United States, 328 U.S. 781, 788-789 (1946);

United States v. Consolidated La'undries Corp., 291 F.2d 563 (2d Cir. 196l); United States v. Jerrold Electronics Corp., 187 F.

Supp. 545, 567 (E.D. Pa. 1960); United States v. General Electric Co., 80 F. Supp. 989, 1016 (S.D.N.Y. 1948). The intent to eixclude competition or control prices can be inferred from the conspirators' course of conduct if they possess a predominant share of a market in relation their competitors. United States v. Grinnell Corp. ,

384 U.S. 563, 570-71 (1966); United States v. Paramount Pictures, 334 U.S. 131, 174 (1948); United States v. Griffith, 334 U.S. at 107,

n. 10 (1948); American Tobacco v. United States, 328 U.S. at 796-97.

7/ An agreement or conspiracy which violates Section 1 may also

.7iolate Section 2. See United States v. Soconv-Vacuum Oil Co.,

310 U.S. at 220, n. 59; 56f teo states v. Er ffEitE7134 U.S. at 106.

The law governing agreements anc conspiracies unaer Section 1 .

(Conclusions L-15 through L-30) is equally applicable to a con-spiracy uncer section 2.

~

46

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a. Refusals to Deal L-37. It is well established that. selective refusals to deal by a single firm can be exclusionary and, ther fore, violate Section 2 of the Sherman Act, if that firm possesses monopoly power. A company with a lawful monopoly in one market may not expand that monopoly into another market by selectively refusing to deal.

Lorain Journal Co. v. United States, 342 U.S. 143 (1951); Eastman Kodak Co. v. Southern Photo Materials Co., 273 U.S. 359 (1927);

Six Twenty-Nine Productions v. Rollins Telecasting, Inc., 365 F.21

' 478 (5th Cir. 1966); Packaged Programs, Inc. v. Westinghouse Broadcasting, 225 F.2d 708 43d,Cir. 1953).

L-38..The case.most' clearly in point in this proceeding on refusals to deal by a monopolist is Otter Tail Power Co. v. United States, supra. Otter Tail involved the' application of both the monopolization and . attempt to monopolize provisions of Section 2 to an integrated electric power company which generated, transmitted and distributed electric power in adjsc'ent parts of Minnesota, North Dakota and South Dakota. Otter Tail had the only subtransmission system in this area. It distributed electricity in some 465 towns in its service area and sold power at wholesale to 17 other munici-palities, which engaged in distribution.. The District Court found that Otter Tail possessed monopoly power in the relevant market and maintained this market power by refusing to deal. When munici-palities Otter Tail served at retail (pursuant to a limited dura-tion franchise) desired to set up their own distribution systems, 47

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, s .

the company refused to sell power to these systems at wholesale and further refused to sell transmission services so that power co.uld be moved across its system from other suppliers. 8/ Since, in most instances, there was no other way for such a town to pur-chase power, it was left with'two choices: (1) either abandon its plaa and renew Otter Tail's franchise or (2) establish a high cost, isolated generation system. The District Court found that Otter

~

Tail's refusals to deal constituted illegal monopolization and attempted monopolization under Section 2 of. the Sherman Act. 9/

It enjoined Otter Tail from refusing to sell or to wheel power for municipal systems in its own area. The Supreme Court af firmed this portion of the District Court decision.

8/ Otter Tail was also a party to a territorial allocation agree-ment with the U.S. Bureau of Reclamation. The substance of this agreement was that Otter Tail would not wheel power for USBR to cities where it held a franchise to serve at retail. The agree-ment was another manifestation of Otter Tail's policy of refusing to deal in transmission services.

9/ The Supreme Court did not have to reach the issue of whether a refusal to wneel in and of itself, or a refusal to sell power in and of itself, was a violation of the ' antitrust laws, since Otter Tail was engaging in a combination of anticompetitive acto which together constituted monopolization. Nevertheless, a fair read-ing of Otter Tail is that, at a minimum, the Court believed that each element or the monopolization (namely, refusals to wheel and refusals to sell power) raised artificial barriers to enter-ing the market and was thus anticompetitive -- i.e. , was a policy or practice inconsistent with the antitrust laws.

48 e

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b. " Bottleneck" Monopolization L-39. Unilateral refusals to deal may also violate Section 2 of the Sherman Act in cases where there was no demonstration of a firm's monopoly of sales in a relevant market.- Control by a company (ies) of a " bottleneck" resource -- 'i.e., a facility or service which cannot practicably be duplicated and to which access is a signifi-cant factor in a firm's competitive ability -- is suf ficient to establish monopoly power. A refusal to deal or to grant access to a " bottleneck" factor of production which has an ef fect 'on competi-tion in a final product market constitutes monopolization in violation of the Sherman Act. Associated Press v. United States, 326 U.S. 1 (1945) (refusal to grant access to news services affecting competition in newspapers); United States v. Terminal Railroad Ass'n., 224 U.S. 383 (1912) (refusal to grant access to a railroad bridge affecting competition in transcontinental rail-road . service); Gamco. Inc. v. Providence Fruit & Produce Building, Inc., 194 F.2d 4d4 (1st Cir. 1952), cert. denied, 344 U.S. 817 (1952) (refusal to grant access to a fruit market thereby affect-ing competition in the wholesale fruit' business); Otter Tail, supra (refusal to grant access to subtransmission thereby affect-ing competition in retail electric. sales) .

L-40. The competitive advantage af forded by the " bottleneck" service need not be indispensably necessary to competitive survival; it is sufficient that without it the excluded competitor is at a

" competitive disadvantage." Associated Press v. United States, 49 l

i e l

326 U.S. at 17 '.8. This was stressed by Judge Learned Hand for the three-judge District Court in Associated Press, in a passage quoted with approval by the Supreme Court:

Most monopolies, like most patents, give control over only some of the means of production for which there is a substitute; the possessor enjoys an advantage over his competitors, but he can seldom shut them out altogether; his monopoly is measured by the handicap he can impose . . . . And yet that advantage alone may make a monopoly unlawful. 326 U.S. at 17, n. 17.

Thus, possession of a " bottleneck" service or facil'ity may gener-ate monopoly power even though other alternatives are available.

As the court of Appeals stated in Gamco, 194 F.2d at 487:

[A] monopolized resource seldom lacks substitutes; alternatives will not excuse monopolization. . . .

To impose upon plai'ntiff the additional expenses of developing another site, attracting buyers and tran-shipping his fruit and produce by.. truck is clearly to extract a monopolist's advantage.

L-41. In denying ~ its competitors access to a " bottleneck" resource, the controlling company violates Section 2 of the

• Sherman Act, even though no subsequent.dimunition of competition can be shown. Gamco, 194 F.2d at 487; see also Associated Press,

-326 U.S. at 13.

L-42. Such a denial by a group of controlling companies violates Section 2 even when it is brought about by the veto power of an individual company, Associated Press v.

United States, supra, or because unanimous approval would be required to grant access, United States v. Terminal Railroad Ass'n, supra.

L-43. An electric utility which refuses to grant its competi-tors access to a " bottleneck" resource will thereby violate Section

[.

I 50 l

}' 2 of the Shetman Act. In Otter Tail, 310 U.S. at 377, the Supreme Court found that the defendant electric utility possessed "a strategic dominance in the tra6smission of power in most of its service area" -- i.e., it controlled a'subtransmission network which was a bottleneck to entering the relevant market. Otter Tail's refusal to grant access

+ - .his " bottleneck facility" was deemed a violation of Section 2 of the Sherman Act. The subtransmission network 'to which the competing municipal systems were denied access was owned solely by Otter Tail. Thus, a single firm " bottleneck" is as fully subject to scrutiny and sanction under Section 2 of the Sherman Act as is a " bottleneck" controlled by a group of companies. ,

c. Other Exclusionary Practices L-44. In addition to refusals to deal and conduct viola-tive of Section 1 of the Sherman Act, there are other exclusionary practices which, when engaged in by a' company possessing monopoly power, violate Section 2 For example, one such practice is a

" rate squeeze." A " rate" or " price squeeze" occurs when an electric utility which sells power at retail (to ultimate consumers and at wholesale ( to systems. which compete with it at retail)' employs a discriminatory dual rate structure whl :h restrains competition at retail. It is clear that a rate squeeze can restrain competition in the retail sale of electric power. Federal Power Commission v. Conway. 44 U.S.L.W. 4777 (1976). A finding of monopolization under Section 2 may be 51

based solely upon a showing of monopoly power, a history of acquiring competing systems, and the employment of a rate squeeze. City of Mishawaka, _et al. v. Indiana & Michigan Electric Co., 1975 CCH Trade Cases 160,318 (N.D. Ind. 1975). 10/.

While the ef fect upon competition of a rate squeeze must now be considered in regulating rates, Federal _ _ Power Commission v. Qonway, supra, such consideration is only a single factor in determining whether those rates f all within a "just and reasonable" range, 11/

and does not immunize a rate squeeze from antitrust attack. Otter Tail, 410 U.S. at 373-74; City of Mishawaka, 1975 CCH Trade Cases at 66,284. . -

3. The Relevant Mar'kets L-45. The existence and extent of. monopoly power cannot be deter-mined in a vacuum; it must be established and measured in the con-text of a relevant product and geographic market or markets. E.g.,

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

L-46. The method for definition o'f a relevant product market is well established. "[Cl ommodities reasonable interchangcable by consumers for the same purposes make up that 'part of the trade or commerce,' monopolization of which may be illegal." United 10/ AlthEugh certain conclusions reached in City of Mishawaka may be in conflict with the opinion in Federal Eo_wer Commission

v. Conway, 44 U.S.L.W. 4777 (1976), the District Court's con-clusion that a rate squeeze was exclusionary conduct sufficient to violate Section 2 is not within the scope of potential con-flict and, indeed, complements the Supreme Court's holding in Conway.

11/ See Federal Power Commission v. Conway, 44 U.S.L.W. at 4779, anc cases cited therein.

52

j.

States v. DuPont, 351 U.S. 377, 395 (1956). For products to be deemed interchangeable, two f actual questions must be answered in the af firmative: (1) whether the physical characteristics of products are such that they can be used for the same purpose, (2) whether a purchaser is willing to substitute one product for the other. United States v. Chas. Pfizer & Co.. Inc., 246 F. Supp. 464, 468 (E.D.N.Y. 1965).

L-47. It is well established that a " cluster" or " bundle" of services may constitue a relevant product market. United States v.

Phillipsburg National Bank, 399 U.S. 350 (1970); United _S tates v.

Grinnell Corp., 384 U.S. 563 (1966); United States v. Philadelphia National _ Bank, 374 U.S. 321 (1963); Consumers Power Company (Midland Units 1 and 2), LBP-75-39, 2.N.R.C.I. 29,.45 (1975).

L-48. It is equally well established that the "in house" re-quirements of a vertically integrated firm are included in the ,

relevant product market when determining whether that firm has monopoly power. United States v. Aluminum Company of America, 148 F.2d 416, 424 (2d Cir. 1945); United States v. Greater Buffalo Press, 402 U.S. 549, 555 (1971).

L-49. A relevant geographic market -- i.e., the geographic extent of a product market -- must " correspond to commercial realities of the industry and be economically significant." Brown Shoe Co. v. Uni __ted S ta tes , 370 U.S. 294, 336-337 (1962). Stated differently, "[T]he area of effective competition in the known 53 l

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line of commerce must be charted by careful selection of the market area in which the seller operates, and to which the purchaser can practicably turn for supplies." United States v.' Philadelphia National Bank, 374 U.S. 321, 359 (1963).

4.01 There are four appropriate product markets for use in this proceeding: the retail distribution firm power market, in which electric distribution systems supply firm powe'r to ultimate consumers; the wholesale-for-resale firm power market, in which producers (or wholesalers) of firm electric power in bulk supply that power to the distribution systems; the " regional power exchange" market, in which producers of firm electric power transact with one another for necessary inputs or f ac. tors of producing firm power in bulk; and the " bulk power services" market (Wein DJ 587, pp.97-101; Hughes NRC 207, pp. 17-20).

4.02 Retail distribution firm power is a distinct product, not reasonably interchangeable with ot'her products, and is therefore a relevant context in which to conduct a market for analysis in this proceedine- (Wein DJ 587, pp. 97-98; Tr. 6625-26, 6834-87, 7004-13). Lik> wise, wholesale firm power is a distinct, non-interchangeable product which constitutes an appropriate market in which to me'asure monopoly power (Wein DJ 587, pp. 97-98; Tr. 7004-12, 7015-17, 7020-28). This market includes both " captive -- i.e.,

the in-house requirements of a vertically integrated utility

-- and "non-captive" wholesale firm power (Wein DJ 587, p. 98; Tr.

54

(

6992; see Finding 3.06 and Conclusion L-48). The " regional power exchange" market is a third distinct product market which is relevant in this pro ~ceeding (Wein DJ 587, pp.99-107; Tr. 7012-31; DJ 588).

This market includes the f actors of productibn which are required to produce firm power (Wein DJ 587, p.99-100; Tr. 7013, 7018-19, 7023-24, 7027). These factors of production may properly be con-sidered separately from wholesal'e firm power (Wein Tr. 7013, 7015-17, 7020-22, 7025-7026), and there is no reason to separate the cluster or bundle of services comprising the " regional power exchange" into individual product markets (Wei,n Tr. 7013-16; see Conclusion L-47).

Electric utilities agree with one another to offer and receive a range of power exchange services as such services may become available or be needed (Wein DJ 587, pp.99-107; Tr. 7015-16, 7028-29; DJ 588).

4.03 If the " regional power exchange" market were combined with the wholesale firm power market, one would obtain the " bulk power services" mar ket (Hughes NRC 207, pp. 17-20; Wein Tr. 7015-17, 7020). The two former markets can properly be considered appro-priate submarkets of the " bulk power services" market (Hughes Tr.

4098-99; Wein Tr, 7015-17, 7020).

4.04 The appropriate geographic markets for analysis of retail sales are the respective retail service areas of each of the CAPCO companies. These are the geographic areas where the respective Applicants sell or could reasonably compete to sell electric power 55

r .

at retail (Wein DJ 587, pp. 112-31, 137-39; Tr. 6890-917; C 1).

4.05 S'imilarly, each of the Applicant's respective service areas define the geographic markets for sale's of firm power at whole-sale since these are the areas in which the respective Applicants sell or could reasonably compete to sell firm power in bulk to elec-tric distribution systems, including supplying their own " captive" loa'ds (Wein DJ 587, pp. 112, 131-39; Tr. 6976-7012, 7040-45; C 1).

4.06 The relevant geographic market for the " regional power exchange" product market is the CCCT -- i.e., the entire CAPCO service area (Wein DJ 587, pp'. 112, 139-44; Tr. 7030-46). The geographic extent of the " regional power exchange" market may be

' viewed as the locus of all gateways to and from the in te rconnec ted transmission network, to which ate tied load centers, generation p

'oints, bulk power substations, and other facilities (Wein DJ 587, pp. 142-43, Tr. 7031-32). It is not necessary for purposes of the proceeding to place definite boundaries on the " regional ' power exchange" market, nor is it necessary to ascertain the geographic region witnin which particular types of, power exchange transactions occur, because the relevance of the " regional power exchange" market to tnis proceeding lies in the availability or non-availability of access to this market to smaller electric utilities in the CCCT

( Wein DJ 58 7, p. 145-4 7, Tr . 7031-33, 7035).

56 l

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'4,.07 There are two types of geographic markets for the " bulk power services" product market. The first is comprised of the service areas of the individual Applicants -- comparable to the geographic markets for sales of firm power at wholesale; the second consists of the entire CCCT and is coextensive with the geographic extent of the " regional power exchange." (Hughes NRC 207., pp. 20-23.)

C. APPLICANTS' MONOPOLY _ POWER L-50. The existence of monopoly power can be established either by demonstrating strategic control over a " bottleneck" facility, or by inference from a large share of the sales of the relevant product in the relevant geographic market. Otter Tail, supra; Grinnell, supra. The Supreme Court has inferred monopoly power from a statistically predominant market share as low as 68 percent.

Otter _ Tail Power Company v. United States, 410 U.S. 366, 370, 377 (1973) [91%]; American Tobacco v. United States, 328 U.S. 781c 795 (1946) [68-60%]; United States v. United Shoe _ Machinery, 110 F. Supp.

295 (D. Mass. 1953), aff'd per curiam, 347 U.S. 521 (1954) [75-85%).

L-51. In order for a violation to be established, the requisite market power need only be domonstrated in a single relevant product and geographic market--it is not recessary to show such power in every market in which the defendant participates. See, e.g., Van Cayo & Sons Co. v. American Can Co., 278 U.S. 245, 253 (1929); United _ States v. E. I. duPont de Nemours & Co., 353 U.S.

586, 594-95, n. 13 (1957); United States v. Bethlehem Steel Corp.,

168 F. Supp. 576, 595, n. 3d (S.D.N.Y. 1958). If the requisite l 57 l

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market power is demonstrated in a relevant market, the existence of less comprehensive or narrower submarkets is immaterial. See United States v. Phillipsburg National Bank, 399 U.S. 350, 360 (1970).

5.01 In the retail markets, each of the Applicants has over-

' whelming monopoly power. In the 1973 test year, CEI made 96.41 per cent of the retail sales of firm power which were made in the relevant geographic market (DJ 587, p. 65A); DL, 99.93 per cent (DJ 587, p.

74); OE, 94.17 per cent (DJ 587, p. 69; NRC 164, p. 22); PPC, 96.95 per cent (nJ 587, p. 69; NRC,166, p. 22),; and TE, 94.55 per cent (DJ 587, p. 73 ) . 12/. Collectively, the Applicants made 95 per cent of the retail sales of firm power which were made in the CCCT in 1973 (DJ 587, p. 76).

5.02 The Applicants have even greater indivdual monopoly power in the sale of firm power at wholesale for resale. During the test year, CEI made 96.41 per cent of the wholesale sales made in the geographic market in which it serves (DJ 587, p. 65A); DL, 100 per cent (DJ 587, p. 74); OE, 96.d6 per cent (DJ 587, p. 69; NRC 164,

p. 22); PPC, 100 per cent ( DJ 587 , p . 6,9 ; NRC 166, p. 22); and TE, 98.60.per' cent (DJ 587, p. 73). 13/ Applicants' combined wholesale 12/ Sales and generating capacity of Buckeye Power, Inc. and its members have been excluded in the geographic markets in which OE and TE. serve; this does not materially alter tne market shares or do.ninance of those companies ( see DJ Sd7, pp. 75-76). This is demonstrated by the CAPCO market data which do include Buckeye sales ana generating capacity.

13/ Ibid.

5d

sales c6nstitute 97.06 per cent of all wholesale sales made in the CCCT in 1973 ( DJ 587, p. 76).

5.03 The record demonstrates that the Applicants, individually and collectively, possess complete dominance over generation.

Their admission that "each of the applicants

• dominate the generation of bulk power in their service areas" (Tr. 440-41) is reinforced by the evidence. In the test year, CEI controlled 94.11 per cent of the generating capacity in its service area (DJ'587, p. 65A); DL, 99.90 per cent (DJ 587, p. 74); 08, 96.61 per cent ( DJ 587, p. 69; NRC 164, pp. 4-5); PPC, 100 per cent (DJ 587, p. 69; NRC 166, pp. 4-5); DE and PPC, 97.08 per cent (DJ 587,

p. 69); and TE, 95.68 per cent ( DJ 587, p. 73). 14/ Within the CCCT in 1973, the Applicants controlled 95 per cent of all existing gen-erating capacity (DJ 587, p. 76). 15/

5.04 Applicants' individual and collective dominance over trans-mission f acilities is demonstrated by the f act that they control virtually all -- 99.3 per cent -- of the transmission facilities of 66 kilovolts and above located within the CCCT (Guy NRC 133, p. 28).

CEI controls 96.8 per cent of such facilities located within its service area; DL, 100 per cent; OE, 99.8 per cent; PPC, 100.0 per cent; OE and PPC, 99.8 per cent; and TE, 99.2 per cent (Hughes NRC 207, table between pp. 26 and 27; Guy NRC 133, p. 28).

14/ Ibid.

15/ There is evicence of record concerning Applicants' dominance over generation wnich differs slightly, though insignificantly, from that se t out above: CEI controlled 94.4 %; DL, 100 %; OE, 97.9%;

PPC, 100h; OE and PPC, 98.2%; TE, 96.1%; and the CAPCO companies collectively, 97.1% -(Hughes NRC 207, table between pp. 26 and 27; Guy NRC 133, p. 23).

59 4

' . l) 5.05 Applicants' monopoly power is demonstrated by their overwhelmingly.large shares of the sales in the wholesale and retail power markets. Their dominance in large-scale generation, their. control over strategically dominant transmission networks, and their control of the only vehicle for coordination in the CCCT -- the CAPCO Pool -- constitute domination over every factor of production necessary to coordinated operation and development in the CCCT. These factors, taken together, give Applicants and absolute control over access to the " Regional Power Exchange"

" Bulk Power Services" wichin the CCCT. . (Wein DJ 587, pp. 143-44; ,

Hughes NRC 207, pp. 27-29. )

D. APPLICANTS' ACTIVITIES

1. The Cleveland Electric Illuminating Company I a. Coordinated Operation and Development 6.01 CEI and the Municipal Electric Light Plant ("MELP") of the City of Cleveland historically have competed on a " customer-to-customer and street-to-street basis in. a sizeable portion of the e.g.,

City" (HRC 70) for all classes of retail customers (See, DJ 340-41, DJ 346; Rudolph DJ 558, pp. 58-59, 120-22; Loshing DJ 560, p. 14; Farling DJ 563, pp. 36-37 ; DJ 604-05; C 11-14, 19, 90, 160). Rates and quality of service were and are the principal ele-ments of competition between these utilities. CEI has been aware 60

! - ~ ,

i of MELP's ability to attract customers through lower rates (Rudolph DJ 558, pp.120-21; Besse DJ 559, p. 57; Loshing DJ 560, pp. 17-18, 128; Maugans DJ 565, pp. 21-23; Wyman DJ 566, p. 67; Gould DJ 569, pp. 22-23; DJ 340, 344, 347), and has engaged in cutthroat competi-tion (Wein Tr. 6622-23) to counter this rate advantage by giving free promotional allowances in areas where it is in competition with municipal systems while not giving such allowances in noncom-petitive areas (Rudolph DJ 558, pp. 16-17 and chart following p. .

245; Wyman DJ 566, pp. 60-61; Bingham Tr. 10,323-25). CEI believes it can offer customers more reliable power than the isolated MELP system, because of the benefits of coordinated oper,ation and development available to CEI through its inter-connections (DJ 329, DJ 352; Rudolph DJ 558, pp. 124-27, 150-151; C 11, 13-14, 154-56; Williams Tr. 10351). CEI recognized that its relatively greater reliability would convert MELP customers to CEI service (DJ 344-45, 348-50; 352, 378-79; Rudolph DJ 558, pp.

122-24; Besse DJ 559, pp. 60-61,; Loshing DJ 560, pp. 21-22,132; .

Parling DJ 563, pp. 36-37; Maugans DJ 565, p. 23; Wyman DJ 566, pp.'62, 110-11; Lindseth DJ 568, pp. bO-61; Gould DJ 569, pp. 22-24, 94-96; C 11, 13-14, 19, 157-60).

6.02 Because CEI believed tha t interconnection would make MELP more compet(tive, the company oppose.d any interconnection with MELP 61 .

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except upon terms which would eliminate competition. CEI recognized that MELP could not feasibly interconnect with any other utility

( D'J 295, 568), and it was CEI's official policy through at least 1968 to precondition its interconnection with MELP upon a price-fixing agreement (DJ 330). CEI offered MELP an interconnection contingent upon " rate equalization" upon numerous occasions, beginning in 1962 (DJ 293-99, 341; DJ 5'60, pp. 24, 233-4; Lindseth ,

DJ 568, pp. 13-15; DJ 621; C 6, 71, 96,99-100, 111). 16/ Another CEI motivation for its early offers to interconnect with MELP was the company's desire , to forestall MELP's expanding its generating plant through the addition of a 75 mw unit (DJ 293, 295, 297),

since this unit would generate less costly power and make MELP more competitive (DJ 312-13); CEI suggested to MELP that inter-connection would make the proposed plant expansion unnecessary (DJ 293, 295, 297).

16/ CEI's contention that it demanded " rate equalization" to eliminate a taxpayer subsidy to MELP is immaterial for this per se violation (Conclusion L-26).

During this period , CEI also sought to achieve rate equaliza-tion with MELP by promoting free street light (ng for Cleveland which would, in effect, force.MELP to raise its rates (Loshing DJ 560, pp. 99 104, 168, 233-35; C 68. 95, 112).

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6'.03 MELP expressed an interest in ' interconnection with CEI as early as 1965 (DJ 297). 17/ Notwithstanding this " expressed keen interest" in interconnection (DJ 299), MELP rejected CEI's price-fixing proposals in 1965 and 1966 ( DJ 297, 621; Besse Tr.

12,277).

CEI remained aware of MELP's continued desire for an interconnection (C 49, p. 7; C 50, p. 5), but did not modify its pol' icy of requiring rate-fixing as a precondition to interconnec-tion (DJ 330) . 1_8/

6.04 In order to secure MELP's customers, CEI sought to weaken MELP's reliability through the denial of coordinated operation and development.

CEI recognized the value of reliability in competing for customers (DJ 345; C 13-15, 19, 157.; Finding 6.01), and knew '

that its denial of coordinated operation and development would impair MELP's reliability (DJ 331, 350, 352, 356, 378; Rudolph DJ 558, p.

150-51; Besse DJ 559, p. 127). "A strong permanent interconnection would give MELP the system reliability it so sorely needs" (DJ 331). 19/

CEI believed that MELP's loss of customers due to black-outs would erode MELP's revenue base (Loshing DJ 560, p. 15; Gould DJ 569, pp. 110-12;'C 72, 85) and ' force it to raise its rates, 17/

and CEI "Tne City" has longLocher Mayor desired an interconnection between MELP February 17, 1965 (DJ 297). to Ralph Besse, president of CEI, 18/

In August of 1967, CEI's chief executive informed the other Xpplicants (C 50, p. 5). that CEI was "on notice to interconnect" with MELP 19/ Clement T. Loshing, CEI treasurcr, with copies to all CEI officers. to Lee Howley, June 17, 1969, i 63 e

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thereby eliminating any rate competition with CEI (DJ 331; Hinchee Tr. 2804).

6.05 In 1969, MELP requested an interconnection for standby power for the purpose of shutting down one of its generators to install pollution control equipment (DJ 331-33). At that time, MELP wanted a permanent, synchronous interconnection in order to achieve the full benefits of coordinated op ration and development (DJ 331, 333, 337; C 127; Titus Tr. 7505). CEI assumed that the FPC would eventually ord'er it to interconnect with MELP (DJ 331, 334; DJ 509, p. 4043-47; Rudolph DJ 558, pp. 65, 70-71; Besse DJ 559, pp. 126-27; Loshing DJ 560,,p. 136-37;,C 84, p. 10; C 90, pp. 9-10; C 91, p. 12; C 108-09, 128), and offered MELP an 11 kV load transfer arrangement which would provide " limited, temporary help without parallel operation" ( aJ 331, May 29, 1969 memo, p. 2). The load transfer arrangement 20/ was designed to avoid the favorabi a " impact that a strong interconnection would have on financial and reliability f actors" of MELP's system (DJ 331, p. I). 21/ CF.I was aware of MELP's dissatisfaction with a mere load transfer (DJ 331, May 29, 1969 memo), and fearing tha t the outstanding request would " trigger the permanent interconnection question',' before the FPC, developed 20/ "A kind of Rube Goldberg way of feeding them [MELP]" (Lester DJ 561, p. 26).

21/ CEI believed that it could benefit from parallel intercon-nection with MELP (Lester DJ 336; DJ 561, pp. 27-28). Also, CEI had the capacity at that time to provide full backup for the 75 mw MELP unit ( DJ 331; C 119, 125-26, 132-33, 138, 140).

64

i policy alternatives consistent with its goal of eliminating MELP as a competitor (DJ 331) . 22/

6.06 MELP was forced to accept the load transfer arrange-ment due to a generating outage during December of 1969 (Hauser Tr.

10,539). In January of 1970, CEI and MELP agreed to a three-phase plan: phases one and two dealt with the implementation of load transfer., and pnase three consisted of an agreement to conduct joint studies which would lead to a permanent interconnection (NRC 195; App. 198). 23/ CEI deliberately delayed the establishment of such a tie by insis' ting that the " permanent" connection be "nonsynchronous"

--22/ ".*. . there are three courses of action open to us:

(1) Avoid an interconnection and run the risk of an FPC

. dictated intercornection, hoping that the financial and service problemt will eliminate MELP as a competitive threat. (2) Tt .e the initiative in establishing an interconnection with proper stanoby charges, to give them reliability but increase the ' financial pressure on them. (3) Make an all-out effort to purchase MELP now while the reliability and financial pressures are still present." (DJ 331, p. 4.)

23/ Applicants' contention that MELP proposed the three phase interconnection plan is true only insofar as MELP desired the third phase, a permanent parallel interconnection. App. 198 indicates that MELP merely acquiesced to CEI's reoffer of the previously unacceptable load transfer plan which had been " dusted off" in the face of tne MELP's emergency (Hauser Tr'. 10,539) and potential FPC intervention (DJ 334). .

65

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n (App. 200). 24/ In Spring of 1971, CEI's engineers admitted to Commi'ssioner Hinchee that there had been no "real engineering investigation" since the January 1970 agreement (Hinchee Tr. 2667-68, 2778-80). This forced MELP to file a complaint with the FPC in May 1971, requesting an interconnection order (App. 18; Hinchee Tr. 2668-69).

6.07 CEI devised a plan for a 69 kv nonsynchronous tie at 40 mva which would provide MELP with relief that could not "be proven inadequate with relative ease", but which would enable CEI to con-tinue to avoid permanent parallel operation "like the plague" (DJ 334, 338) and " maximize the burden" on MELP (Rudolph DJ 558, pp. ,

92-9-3). CEI submitted this plan to the FPC (Hauser Tr. 10,566),

which approved it as a temporary connection on March 8,1972 (App. 19). 25/

6.08 CEI delayed rompletion of the 69 kV intertie , thereby per-petuating the inequities of the 11 kv load transfer arrangement and f'urther delaying a permanent interconnection (C 141). CEI delayed construction for 16 months (App. 100-01; Hart Tr. 4722) arguing

=--

24/ CEI was aware that " Phase III" contemplated a permanent parallel interconnection (DJ 336, 338; Lester DJ 561, pp. 27-28; App. 199; Hinchee Tr. 2768). Nonparallel ties are not considered to be true interconnections (Hinchee Tr. 2670). Mr. Hauser char-acterized the 69 kv nonsynchronous tie as " temporary" (Tr. 10,564).

25/

MELP sought a synchronous, permanent interconnection befo're the FPC (App. 18).

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that MELP had not paid for tue construction; throughout this period, CEI held MELP's purchase order for the entire amount in question without making any attempt to. negotiate it. 26/

( DJ 7, 179, 180, App. 99; Hart Tr. 4722). Completion of the 69 kv construction was additionally delayed by CEI's refusal to furnish MELP necessary engine ing data (Hinchee Tr. 2772-73).

6.09 CEI operated the 11 kv load transfer in such a way a3

~

to maximize the financial burden on MELP and to minimize service reliability for MELP's cust.omers. When .MELP needed power from CEI, the load transfer was operated so as to cause an outage on MELP's system (Titas DJ 564, pp. 90-93; Mayben C 161, p.

10; C 82; App. 134, 159; Hauser Tr. 10;649-51; Hinchee Tr. 2626, 2665, 2761-63), although no outage need have occurred (Firestone DJ 575, p. 54). CEI imposed administrative delays on the implemen-tation of load transfer tha t increased 'the length of time MELP 26/ The City is required to and does set aside sufficient funds at the time a purchase order is issued .to cover the order; these l funds remain ser aside while tne purchase order is outstanding (DJ i 7; DJ 180; Hart Tr. 4722).

i CEI further contends that MELP's antitrust allegations were litigated before the FPC and the parties in this proceeding are estopped fro.n _ relitigating these issues. The Department has set forth its response to this issue the Memorandum of the Department of Justice in Response to Applicants ' Individual Motions to Dismiss (hereinafter " Response"), filed May 17, 1976, at pages 32-45, which are hereby incorporated by reference.

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customers were without power. 27/ CEI was aware that MELP's outages

,. resulted in the conversion of customers from MELP to CEI ( DJ 344-50; DJ 352; Besse DJ 559, p. 60; Loshing DJ 560, p.132-33; Farling DJ 563, pp. 36-37 ; Wyman DJ 566, p. 62; Gould DJ 569, p. 24, 94-95; C 11-12, 14-15, 19; C.158, p. 59), and sent salesmen to solicit the af fected MELP customers af ter these outages (DJ 352; Hinchee Tr. 2691-95).-

• 6.10 CEI operated the 69 kv interconnection as a load transfer point, even though it could easily have been operated in parallel with MELP's system (Lester DJ 561, pp. 27-28; C 140; App. 45). 28/

In the summer of 1969, due to a strike, CEI could not continuously generate all of its own power needs and was in need of outside assistance (Hauser Tr. 10,692).

MELP offered emergency power to CEI and requested that the 69 kv switch be energized and lef t closed 27/ Even under CEI's operating procedure which required an outage, the load transfers could have be.en effectuated with only a three to five second service interruptiod (Hinchee Tr. 2665-66, 2761-62).

CEI, however, required the approval of each load transfer by Mr. Hauser, corporate solicitor, rather than by operating personnel, who supplied Mr. Hauser with all the information he used to make the decision, i.e., whether CEI had capacity and whether MELP was utilizing its capacity (Titas DJ 564, pp. 52-62). This procedure necessitated contacting Mr. Hauser by telephone (Hauser Tr. 10,541-43; Ti tas DJ 564, pp. 52-62) and resulted in outages to MELP customers of periods from minutes in length up to two hours (Titas DJ 564, pp. 91-93). Mr. Hauser on cross-examination, was unable to explain why his approval was necessary for what was essentially an engineering decision (Hauser Tr. 10,684-89). .Furthermore, when MELP suggested that radio be used rather than telephone, CEI rej ec ted this time-saving

, proposal without explanation (Hinchee Tr. 2761-62).

2d/ In fact, this 69 kv tie had been test operated in parallel (App. 45, p. 4). The FPC's order did not. prevent synchronous operation (App. 19, 20).

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so this power would be available to CEI (DJ 3; Hinchee Tr. 2692-95, 2725-26). Parallel operation of the 69 kv service would have been beneficial to CEI (DJ 336; Lester DJ 561, pp. 27-28), 29/ but CEI refused the of fer (DJ 4) which deprived MELP of the bcnefits of this potential coordinated operation. In addition, administrative delays, similar to those attending operation of the 11 kv load transfers, of as long as 12 hours1.388889e-4 days <br />0.00333 hours <br />1.984127e-5 weeks <br />4.566e-6 months <br />.were involved in implementing the 69 kv service (Hinchee Tr. 2670-71). In Lecember 1972, CEI withheld 69 kv service from MELP during a blackout in order to I . coerce MELP's execution of a street lighting contract with CEI (Kudukis Tr. 7496-98; Hauser Tr. 10,572-73). This tie-in sale is another example of CEI's abuse of monopoly power.

6.11 MELP was forced to take power over the 11 kv and 69 kv load transfer points on conditions th'a't prevented'the municipal system from performing necessary maintenance on its generating units. The 11 kv load transfer points were not energized until MELP was utilizing all of its capacity,(Hinchee Tr. 2670; Hauser Tr. 10,688). The 69 kv load transfer point was not energized until all 11 kv load transfer points had been energized (C 145; Hinchee Tr. 2670). MELP was thus prevented from taking units out of . service for maintenance (Hinchee Tr. 2797-98) which caused d'eterioration of its system and diminished the reliability of its service, thereby causing severe competitive injury (Mayben 29/ CEI contends that MELP's offer was worthless since MELP was purchasing power f rom CEI for the entire period (Hauser Tr. 10692-93). However, for 75 days during the 121 day strike , MELP took no power from CEI (Hauser Tr. 10,737-38; App. 134).

69

8 e C 161, pp. 13-14; Hinchee Tr. 2666, 269'2-93). CEI refused load transfer service to MELP several times, purportedly due to a lack of CEI generation (Hauser Tr. 10,698-700; App. 134), 30/ but CEI made no attempt to 'obtain power for MELP from other utilities with which it was interconnected (Hauser Tr. 10,700-04).

6.12 CEI and MELP reached an agrecment for a permanent inter-connection (NRC 204) only af ter over five years of negotiation under "Ph,ase III" (See Finding 6.06). This agreement requires MELP to carry a reserve margin of 70 per cent which places an " unusual and unjustifiable burden" on MELP (Mozer NRC 205, pp. 50-52). This agree-ment also makes it postible for CEI to supply emergency power to MELP without seeking lower cost alternatives through the company's interconnections (Kampmeier DJ 450, pp. 45-46). The extremely limited coordination provided for in this agreement effectively denies MELP the full benefits of coordi'nated operation and develop-ment (Kampmeier DJ 450, pp. 45-46; Mozer NRC 205, pp. 50-57).

6.13 UELP requested participation 'in and access to nuclear power in order to obtain the benefits of coordinated operation and develop-ment, but was never given a meaningful offer by CEI. In 1971,.CEI refused MELP's first request to participate in the company's nuclear generation (Hinchee Tr. 2702-06). On April 13, 1973, MELP again requested access to the Perry, Davis-Besse and Beaver Valley nuclear units, either tnrough the purchase of un'it power or by ownership participation (DJ 182). This was followed oy a request for informa- '

tion relating to participation and access on April 27 (DJ 184).

3g/ On at least one occasion, Mr. Hauser asked CEI personnel to find an excuse to disconnect a certain load transfer point (C 79).

70 -

MELP's specific proposal for participation, together with a suggested meeting date, were sent to CEI on August 10 (DJ 185), two days after CEI's decision to deny MELP access to the Davis-Besse and Beaver Valley Nuclear plants (DJ 291, p. 3). This was followed by a September 10 letter which also requested nuclear participation (App. ol). No substantive response to these repeated requests was received by MELP until a December 13, 1973' meeting, two and one half years af ter MELP's initial request. 31/ -

6.14 CEI's counterproposal was replete with unconscionable a.nticompetitive restraints. This offer, made at the December 13, 1973 meeting between CEI officers and M,ELP representatives, included the following anticompetitive provisions: (1) CEI was to have a "right of first refusal" on nuclear power which wcs surplus to MELP's immediate needs (DJ 188; DJ 291, pp. 18.-22) --

this would have prevented MELP from selling this surplus or using it to engage in coordinated operation with any other utility (Mayben Tr. 7612, 7618); (2) MELP could not sell power to retail or whole's ale customers "below cost"

( DJ 188, DJ 291, pp. 18-21) which would give CEI control over MELP rates (Hart Tr. 4884-85) since CEI w'ould be the one to determine what constituted " cont" (:iart Tr. 5408;. see Hauser Tr. 10,762-63);

(3) prio'r to beginning negotiations over access, MELP had to withdraw all formal and informal requests for antitrust review of CEI's conduct, as well as drop its opposition to CEI's practices and policies in all 31/ Mr. Rudolph, prinsident of CEI, did acknowledge the request of April 13 (DJ 183) by suggesting contact with CEI's attorneys. .

As of September 14, 1973, CEI had not discussed its position 'on participation with MELP ( DJ 291, p. 6). Though representatives of CEI and MELP met cn October 25, 1973, at which time MELP's re-quests were amplified, CEI merely set a date for a later meeting, without~responaing directly to the requests (DJ 291, pp. 8-14).

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a'dmini's.trative hearings and proceedings (DJ 188; DJ 291, pp. 18-22).

These conditions were rejected by MELP (DJ 189). In spite of subse-

_quent proposals between Feb'ruary 1974 and July 1975 (DJ 192; App. 63, 66, 68, 71.72, 74), nuclear access remained conditioned on a "right of first refusal" by CEI. 32/ Even if a " rig,ht of first refusal" had not been insisted upon, MELP would not have been able to sell surplus nuclear. power due to CEI's rejection ( App. 97) of MELP's proposal (DJ 177; NRC 141A, Schedule A; App. 79) that the company "wh. eel dut" power (i.e., transmit power from the nuclear units to an entity other than MELP) . To date, no meaningful offer of access

'has been made by CEI.

6.15 CEI has denied MELP the benefits of coordinated operation and development by refusing to wheel power. 33/

AMP-O obtained 22.7 mw 34/ of cheap hydroelectric power from the Power Authority of the State of New York ("PASNY") Niagara project, which had been allocated to the State of Ohio (DJ 8, 11, 393, 39'6; Hart, Tr. 4694-708, Hinchee Tr. 2677). Th'i-s power was to be made available to the City of Cleveland by AMP-O (DJ 8, 11; .C 167'; Hinchee Tr.2676-77). AMP-O 32/ Applicants' propos+d license conditions (App. 44), which purport to set forth Applicants' of fer of nuclear par ticipation to non-CAPCO entities within the CCCT, provide an unfettered right of resale of surplus nuclear power (App. 44, p. 5). Since these conditions were filed in this proceeding as an attachment to Applicants' Proposal for Expediting the Hearing Prccess on March 14, 1975, it appears that either CEI's negotiations .ith MELP wer'e conducted in bad faith or Applicants have exhibited a deplorable lack of candor before this Board, or both. -

33/ CEI has the ability to wheel (DJ 356), and has wheeled in the past ( DJ 380-82, Rudolph DJ 558, p. 213-14; Lindseth DJ 568, p. 25),

wheeling is an industry practice that is becoming more common today (williams Tr. 10,435).

34/ As much as 180 m i of PASNY power may. ultimately be available for use in Onio (Hinchee Ir. 2673; C 164, p. 34).

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secured, agreements from other utilities to wheel this power from the project to a CEI interconnection point ( DJ 395-97; Hart Tr.

4695-96; Hinchee Tr. 2679). From May 1973 to the present, CEI has repeatedly refused to wheel PASNY power to MELP (DJ 291; DJ 50 8 ,

Exhibit P; Rudolph DJ 558, p. 215; App. 75-76, 78-81, 84, 86-94, 96-97) because "[elconomic studies clearly indicate an arrangement to transmit the PASNY power would provide . . . [MELP] energy at a c.ost which would be injurious to [CEI's] competitive position" (NRC 70). 35/ CEI has also advised MELP that it would not consent to third-party wheeling on any terms (DJ 291).

6.16 Although CEI maintains that it changed its policy with respect to wheeling af ter this proceeding began, the company continues to raise impediments to wheeling. MELP sought to obtain

• power f rom other utilities and had contacted Buckeye Power, Inc.,

Richmond, Indiana, and Orrville, Ohio, which indicated that surplus power was available (DJ 177-78, 193; Hart Tr. 4690-91, 4702-06, 4709-13); CEI has not agreed to wheel this power (Hart Tr. 4707-09, 4713-14, 4924). CEI has professed a present willingress to wheel any power. except that which would be unavailable to CEI because of " legal or conspiratorial impediment" (App. 75, 78, 80-81, 84, 96-97). Except for statements that CEI would require "a

(. Hart Tr. 4708; hpp.

like quantity" of power "at a like price" 78, 80, 84) ,or a " equally open" market (App. 96-97), 2LP

. 35/ CEI contends' that MELP has not yet obtained the. PASNY power.

The record shows that, pursuant to an agreement between AMP-O and Allegheny Electric Cooperative, tne cooperative will receive AMP-O's PASNY allocation until transmission can be arrangeo to MELP (C 166).

Allegheny has successfully defended this agreement in the FPC '(C 167 ) .

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has been unable to ascertain the nature and limits of this restraint in spite of repeated requests for an explanation ( App. 86; Hart Tr. 4708-09). 36/

6.17 Painesville and CEI compete for industrial and residential customers outside the Painesville municipal limits (n1 371; DJ 509 ,

pp. 950, 028, 4050; DJ 510, pp. 3950A, 4052A; DJ 604-05; Pandy Tr.

3097-101). As early as 1962, CEI sought to prevent future competi-tion with Painesville by offering Painesville a territorial alloca-tion agr6ement which would have eliminated competition and foreclosed the growth of the municipal system by alloting to CEI those areas 36/ CEI contende hat it is feasible for MELP to build a competing transmission system to reach other sources of povar, no;vithstanding the company's earlier position (formulated for purposes other than litigation) that it would not be feasible for Cleveland, Painesville and Orr.ville to constr uct ' transmission linking their systems (Lindseth DJ 568, pp. 155-53; DJ 295). Mr. Pandy testified to the " prohibitive cost" of such transmission today (Tr. 3174 ) .

Mr. Caruso testified that it would ,be more economical for MELP to build a radial transmission line to a Pennsylvania Electric Company substation located inside Pennsylvania in order to receive PASNY power, than to continue to purchase emergency power from CEI (App. 162). Such a line would be duplipative of and adjacent to existing CEI transmission facilities (Caruso App. 162, pp. 14, HEC-2) which have surplus capacity available (DJ 358).

The economic and environmental infeasibility of such a line is manifest (Findings 2.29-2.31; Conclusions L-1 and L-2). Further, Mr. Caruso's " savings" are based on comparing the cost of construc-tion with the high cost of the emergency power sold to MELP by CEI (Mayben C 161, p. 14, Tr. 7715-16), rather than with the cost of a bulk power supply available through coordinated operation and development or tven the cost of wholesale firm pcwer.

Mr. Caruso's line is unacceptable for still other reasons.

The Department is aware of no legal authority which would permit an Onio municipality to exercise a right of eminent domain in Pennsylvania. Finally, the reliability of a 75 mile radial line over whien ;i2LP must receive at least a fif th of its power requirements is highly questionable (Kampmeier DJ 450, p. 39-41; DJ 435; App. 237,

.Firestone notes; Eppard Tr. 5453-54).

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where Phinesville had the greatest potential load growth; this offer was rejected oy Painesville (NRC 144; Helsel Tr. 3623-24A). Mr.

Howley of CEI, in or about 1965, renewed this offer (Helsel Tr.

3624A-27).

6.16 Beginning in at least July 1971, Painesville requested an interconnection from CEI (NRC 134; DJ 365 ) . Prior to this request, CEI was aware of Painesville's need for coordinated operation and development; the company believed that Painesville would request an interconnection (DJ 364) and would press the request before the FPC ( DJ 509, pp. 4042, 4047; DJ 510

p. 4052A; DJ 600 ) . CEI there-fore planned to structure it,s " negotiations" for an interconnection to f urther the company's . goal of acquiring the Painesville electric system load (DJ 364). Once negotiations began, CEI considered conditioning the interconnection on customer trading, territorial allocation, limiting the n.unicipal system's service area, and an agreement not to compete (DJ 371) .

6.19 CEI of fered an interconnection to Painesville on anticom-petitive terms in order to eliminate competition. The company pro-posed that it supply an interconnection in consideration for CEI taking over Painesville's greatest load, growth area (DJ 370; NRC 141), together with Painesville's promise not to seek to serve that area in the. future (Helsel Tr*. 3624A; Pandy Tr. 3133-35). 37/ In 37/ CEI contends that Painesville proposed the customer exchange condition for interconnection (Aop. 195). Even if this we e true, tne record is clear that CEI was happy to enter such an . illegal .

arrange.nent with Painesville ( DJ 370-71; Pandy Tr. 3133-35; see also Finding 6.17).

75 L .

i additio6, CEI explicitly conditioned interconnection on rate equaliza-tion, (Pandy Tr. 3152-53). 3d/ Subsequent to Mr. Howley's insistence on rate equalization, but prior to execution of the interconnection  !

agreement, Painesville raised its rates to the level of CEI rates (Pandy Tr. 3175, 3203; NRC 203).

6.20 CEI misused its dominance and monopoly power to secure an anticompetitive and oppressive interconnection agreement with Painesville. This contract contained a "special provision" whereby either party could cancel the contract on 90 days' notice on the grounds that the contract was not in the party's "best interests" (NRC 203; Pandy Tr. 3123-25). .This contract does not provide for the parties to achieve the large benefits that can be gained by sharing reserves, nor does it provide for any of the benefits of coordinated development (Kampmeier DJ 450, p'. 47). In addition, the 25 mw maximum for maintenance power is a " serious burden" on Painesville, but o'nly of neglible consequence to

• CEI (Kampmeier DJ 450, p. 46; Mozer, NRC 205, pp. 53-54). Painesville entered the interconnection agree-ment because the city's power needs made it " desperate" f'r o an inter-connection (Pandy Tr. 3124-25). These unconscionable terms deprive Painesville of most of the benefits of coordinated operation and development.

38/ . This statement was made to Painesville on several occasions (Pandy Tr. 317a).

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6.21 CEI delayed construction of the interconnection, further depriving Painesville of the benefits of coordinated operation and development. A dispute arose in September 1975 as to which party would bear certain costs of the interconnection (Pandy Tr.

3157-58). All areas in this dispute involved construction to be done by CEI (Pandy Tr. 3158). The construction of the interconnec-tion could be completed four to six months af ter the dispute is resolved (Pandy Tr. 3157).

, 6.22 In June of 1974, CEI refused a 'eral request by

, Painesville to wheel third party power (NRC 141), thereby preventing its competitor from obtaining access to tha full benefits of coor-dinated operation and development.

The interconnection agreement .

(NRC 140; see Finding 6.21) provides only that, should CEI find it necessary to secure power for Painesvf11e f *0m an 'outside source, Painesville will reimburse CEI 110 per cent for its out-of-pocket costs; CEI alone determines this necessity (Pandy Tr. 3176-77). '

This anticompetitive provision effectively prevents Painesville from reaching cheap sources of power outside the CEI system and precludes " wheeling out" and resale of power to customers outside the Painesville service area (Pandy Tr. 3176-77). 39/

~

6.23 In April 1973, Painesville requested access to nuclear power (NRC 136A), but to date no meaningful offer of access has been made by CEI, thus preventing Painesville from gaining access to 39/ Painesville has been contacted by several large users of elec-tricity concerning sale of any excess power Painesville might have available. These include Cleveland, Orrville, and Diamond Shamrock '

Corp. (Pandy Tr. 3103, 3118, 3204).

77

nuclear facilities. Painesville has pursued the question of access, especially access to the nearby Perry plant (NRC 138); App. 43, 137).

CEI has never set forth any terms or conditibns under which Painesville might gain such access (Pandy Tr. 3162), notwithstanding the com-pany's professed willingness to grant access to the Davis-Besse and Perry plants (App. 44). This equivocation 40/ on the part of CEI is designed to protract negotiations as was done with the Painesville interconnection agreement (see Finding 6.21) in order to delay the benefits of coordinated operation.

6.24 Since the mid-1960's, CEI has had a territorial agreement with OE with respect to new. customers (DJ 488; Rudolph DJ 558, p. 53).

b. Acquisition 6.25 CEI has a history of expansi,on through ac, quiring compet-ing utility systems (Finding 1.02; Rudolph DJ 558, p. 31; Besse 559, p. 64). .

6.26 The acquisition of MELP is a CEI company goal (DJ 509, pp. 4044, 4049-50; DJ 510, pp. 4055A,*4'064A; Rudolph DJ 558, p.

31; Besse DJ 559, p. 55; Loshing DJ 560 p. 11; DJ 329, 331; C 71).

CEI has made a " continuing study" over the years concerning MELP's acquisition (Loshing DJ 560, p.10), and has examined every aspect s

40/ At one point, CEI contended tna t interconnection offered the same benefits as nuclear access and that, with an interconnection agreement, Painesville would, in fact, have access to the nuclear units (Pandy Tr. 3115-16, 3162; NRC 13d; App. 195).

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from the engineering ramifications (C 134-35; DJ 354) to legal and tax considerations (DJ 355; C 74, p, 25; Tr. 7430). 41/ CEI has offered to discuss the purchase of the MELP plant with Cleveland's Mayors (DJ 296-96; 328; C 71). CEI deliberately implemented its attempts to deny MELP the benefits of coordinated operation and development in order exacerbate MELP's financial and reliability

' dif ficulties and to force the sale of MELP to CEI (DJ 331; Findings 6.03-6.16).

6'.27 The acquisition of the Painesville municipal system is also a CEI company goal ( DJ 509, pp. 4045, 4050; DJ 510; DJ 600; DJ 361, 363-64, 366-68, 371; C 73; NRC 143, p. 24). CEI has studied the cost and revenue impact of the acquisition of Painesville (DJ 560, p. 115-116 ; DJ 366-68; DJ 362-63). CEI also sought to achieve its goal of acquiring Painesville through denying Painesville the benefits of coordinated operation and development (DJ 364, 371; Findings 6.18-6.23). .

6.28 CEI has misused its dominance and monopoly power (Find-ings 5.01-5.05) to deny actual and potential competing utilities the benefits of coordinated operation and development (Findings 6.01-6.24) and to eliminate competition in the relevant markets (Findings 6.01-6.27). This misuse is violative of and inconsistent with the antitrust laws and constitutes an existing situation incon-sistent witn the antitrust laws (Conclusions L-10 through L-43).

41/ See, generally, Rudolph DJ 558, pp. 65-66; DJ 207; Loshing DJ 5b0, pp. 10-11, 15, 82; DJ 32'8-29, 331, 346, 349, 353-55, 366, 599, 601-02; C 72, 75, 92-93, 104, 113-20, 124, 128-30, 134-35; NRC 143).

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i 2 The Duquesne Light Company a, Coordinated Operation and Development 7.01 In 1965 and 1966, DL repeatedly refused to sell Aspinwall wholesale power for resale, 42/ thereby denying the municipal system the benefits of coordinated operation and development. At least as early as October 1965, the Borough Manager of Aspinwall requested that DL sell it firm wholesale power .for resale 43/ (DJ 168). DL's position on such a sale, as expressed by its President, l

Mr. Fleger, was:

We should make clear at all times that we will not provide electricity for resale. We will use .

whatever means are possible to resist this includ- .

ing court action, if necessary . . . . (DJ 169).

42/. DL contends that it did not refuse to sell power at whole-sale in that it was always willing to sell emergency power under

" Rate M" to any municipal system. Such a willingness does not negate DL's refusal to sell firm power at wholesale to municipal systems. DL has~ acknowledged that the.re is a difference between firm wholesale power and emergency power (Gilfillian, Tr. 8478, 8480). Indeed, Mr. Gilfillian's' letters (NRC 16, 19), internal DL memoranda' (NRC 14, 15), as well as correspondence between DL and Pitcairn (NRC ld; DJ 2, 247),'clea,rly distinguish between emergency power under " Rate M" and firm wholesale power. Mr. McCabe testified that Pitcairn inquired about. emergency power only because DL woulo not sell the municipal system any other type of wnolesale power (Tr. 1641-42, 1824-25). Obviously, neither DL nor its municipal competitors considered emergency power to be a substitute for firm wholesale power.

43/- No other electric utility in the vicinity of Aspinwall was willing to sell power at wholesale to municipal systems in DL's service area (dRC 25-29).

80 f .

i 4-7.'02 In April 1966, Mr. Donaldson, the Solicitor of Aspinwall, again asked whether DL would be willing to sell either full or partial requirements firm power to Aspinwall (DJ 170). Mr. Fleger indicated that

[W]e should reply to Donaldson empha'tically that we will not sell power to Aspinwall for resale to their residents. by the Boro. It should be an unequivocal "no" so there is no misunderstanding

-(DJ 171).

This refusal was communicated to Aspinwall by telephone (DJ 173) and by letter (DJ 172, 174). A further request in August 1966 was also refused (DJ 201). DL realized that " time is on our side. A

'no' means Aspinwall would have to litigate and probably can't wait that long" (DJ 173). This memo went on to say that "Aspinwall is asking. for something no other municip lity can get from us -- power on a wholesale basis to resell" (DJ 171).

7.03 Between 1966 and 1968, DL repeatedly refused to sell Pitcairn wholesale power for resale at retail, thereby denying it the benefits of. coordinated operation and development. As early as August 1966, DL refused a request by Pitcairn to sell it firm 1

wholesale power which Pitcairn would then distribute through its own system (DJ 242, 243). In October 1966, DL again refused to supply wholesale firm power to Pitcairn when requested to do so by Pitcairn's consulting engineer (DJ 244). DL's position was that it would not s, ell wholesale power' and, indeed, would resist with all its resources any effort to force such a sale (DJ 245). 44/

44/ DL knew tnat its resources were greater than those of Pitcairn

~nd.that, histor'ically, prolonged litigation has been one of the.

best weapons in antitrust situations (DJ 254).

dl O

e

Numerous other requests for wholesale firm power made during 1968 were also refused by DL (McCabe Tr. 1616-19, 1625, 1643-44, 1654-55; NRC 13-16, 19, 57 ; DJ 2, 249).

7.04 These refusals, and other conduct discussed subsequently, led Pitcairn to file an antitrust action and an FPC complaint against DL (McCabe Tr. 1647, 1653-54). 45/ It was only as part of the settlement of these actions that DL agreed to sell firm power at wholesale to Pitcairn (McCabe Tr.1655, NRC 21-24) . But

" even af ter DL was constrained to sell Pitcairn power , it refused to operate in parallel with ,the municipal system (McCabe Tr.1658, 4169, 4176). 46/ DL then demanded that, if parallel operation were allowed, protective equipment be installed which Pitcairn's consulting engineer found to be grossly. excessive for the intended purpose (McCabe Tr. 4177). Because of the unduly high cost involved, Pitcairn was required to cease generation and take all its power requirements from DL (McCabe Tr. 4177; App. 48).

7.05 DL was not prohibited from selling wholesale firm power by state law. DL has admitted' that, at the present time, it is the Federal Power Commission, not, the State of Pennsylvania, 45/ The Company's suggestion that these actions were filed only tor harassment conflicts. with DL's assessment that Pitcairn had a very good cnance of winning in the FPC and a 50/50 chance of

. prevailing in the antitrust action (DJ 254, 260).

46/ DL's dr. Stark admitted that he did not attend all of the UC-Pitcairn meetings and that he was not in a position to know if such a refusal took place (Stark Tr. 8951) .

• 82

.. . l

f which has exclusive regulatory jurisdiction over wholesale sales to municipal systems. 47/ In fact, the Commission had asserted jurisdiction over wholesale sales by DL at a time when the Company was ref using to make such sales to Pitcairn ( App. 26), pp. 3-4).

7.06 In any event, utility sales for resale are not prohibited by any Pennsylvania law or regulation of general applicability (see Conclusion L-6). 48/ PPC has made sales for resale to municipal systems in its service area pursuant to tariffs filed with the FPC in 1938 (DJ 67-70) and 1966 (NRC 106-10). DL was aware that at least one Pennsylvania utility sold power to a municipal system for resale (DJ 168). The only arguable rehtriction on such sales by the company has been DL's Rule 18, 49/ which apparently does not prohibit such sales when DL wishes to ma'ke them under Rate M (Gilfillan Tr. 8474-75',

8499). It is clear that Rate M could have been amended to provide for firm power sales (Gilfillian Tr. 847.6-77, 8507-09) or that a new rate could have been filed for this purpose. 50/

47/ Prehearing Fact Brief of Duquesne Light Company at page 49.

48/ DL's promised witness on this point (Tr'. 8424-25) never made an appearance.

43/ DL's attempted business justificati'ons for Rule 18 (Gilfillian "E. 8426-30) are specious and anticompetitive. DL's determination (nat there should be no municipal " middleman" between the company and the consumer runs afoul of every antitrust principal as well as Pennsylvania law which authorizes such systems. A non-municipal group aggregating load would be a public utility which could not serve in DL's area (Gilfillian Tr. 8426-30).

50/ DL could not possibly be charged with discrimination for grant-Ing Pitcairn's request since Pitcairn was the only system so situated

( DJ 245). The tact that DL was required by state law to adhere to a tarif f which the Company had promulgated (App. 264, pp.

724-25) does not insulate DL from antitrust liability. Cantor

v. Detroit Edison Co., 44 U.S.L.N. 5357 (July 6, 1976).

83

7;07 DL refused to enter an interchange agreement with Pitcairn.

In mid-1966, DL received a letter f rom Pitcairn in which Pitcairn expressed the desire to discuss an interchange (Gilfillian Tr 8488-89). No such agreement was entered (Gilfillian Tr. 8488 's1) .

7.08 on January 23, 1968, Mr. McCabe met with DL representatives and, among other things, requested that DL and Pitcairn enter into an interchange agreement similar to that which DL had with other electric utilities (McCabe Tr. 1627-28)'; this request was refused by DL (McCabe Tr. 1627-28). The January 23 meeting was followed by a written request (App. 114), which was discussed within the company and with outside counsel (NRC 14, 15, 19; DJ 249) before a written refusal was transmitted to Pitcair: (NRC 16; McCabe, Tr.

1627-28). 51/

7.09 DL refused Pitcairn's request for participation in a nuclear unit. As early as November 1967, Mr. McCabe first voiced 51/ DL's arguments that interchange agreements must disolay

' mutuality" in every particular and that the refusal to enter into such an agreement was justified because Pitcairn's cost of genera-tion was so high that it precluded a mutually beneficial arrange-ment (Gilfillian Tr. 8439) should be given short shrift. Mr.

Dempler's testimony in support of tnese arguments is highly sus-pect. The stuay which he originally t6stified was made for his own use'(Dempler Tr. 6716-17, 8723), turned out to have been prepared specifically for litigation (Dempler Tr. 8888) with the probaole assistance of counsel (DJ 606-10; Tr. 8750-8752).

See also Mr. Dempler's cross-examination at Tr. 8665-729, 874d-32, 8901-08.

DL's suggestion that Pitcairn's generation costs were hign is oisingeneous since DL had refused to allow Pitcairn access to any type o.f coordinated operation or development which would have lowered the municipal system's costs (findings 7.03-7.04, 7.07-7.09).

84

Pitcairn's interest in participation in DL's newly announced joint generation program (DJ 247, p. 2). At a February 21, 1968 meeting, Mr. McCabe formally requested access to a Beaver Valley unit, which request was refused by DL (NRC 17; McCabo Tr. 1636-38, 1839-40). 52/ Pitcairn's interest in nuclear units continues unabated to the present (McCabe Tr. 1716), but DL has not com-municated any change in its policy on n'uclear access to its municipal competitor (McCabe Tr. 1717-19). 53/

b. Acquisition 7.10 DL is a product of acquisitions of and mergers with other utilities (Finding 1.04). It is DL's company philosophy "to 52/ DL has made numerous assertions regarding this refusal, most or which have been answered in the Response , pages 13-15, which are hereby incorporated by reference.

DL's contention that inclusiJn of such a small system as a participant in a nuclear unit would be impractical is clearly contraverted by the existence of NEP00L wherein many muncipal systems of extremely small size have shares of nuclear units (DJ 634, pp. I-l and I-2; see Finding 2.26). DL was aware tha t New England utilities had allowed municipal systems to participate in nuclear plants and characterized thf s As "a dangerous precedent"

( aJ 255, p. 2).

53/ The ' evidence is uncontroverted that Pitcairn has the ability to finance nuclear participation (McCabe Tr. 1718, 1746-50) and that Pennsylyania la'w raises no' barrier to nuclear ownership by municipal systems (DJ 261).

85 l *

• 9

try to purchace municipal systems because they can be a potential threat to the wellbeing of the Company . . . ( aJ 321, p. 2). 54/

7.11 Since 1960, DL has acquired three of the remaining four municipal systems located within its service area (NRC 158, pp. DL-13, 27, 20; Wein DJ 587, p. 74), successfully ut.izing the same gen'ral e pnilosophy and methods in affecting each of these acqui-sitions (DJ 321). 55/ A key element in this overall plan was the denial of coordinated operation and development to the municipal system in question (DJ 321, p. 4).

7.12 The crippling effect of DL's denial of coordinated opera-tion and development.may be observed in its acquisition of the ,

Aspinwall municipal system. Prior to acquisit, ion in 1967, the Aspinwall system was in good condition financially and physically (App. 120, pp. 5, 8-9, 16, 19, 20-23). It had generated revenue 54/ Although Mr. Gilfillian denied on' the stand that this was DL's philosogby (Gilfillian Tr. 8518-20), the language quoted above was part of a speech given by Mr. O'tlan on behalf of DL at an industry meeting in St. Louis in January,1968 and approved in advance by Mr..Gilfillian (Tr. 5490). Further, M'r. Gilfillian stated that he had no reason to believe .that DJ 321 ig inaccurate (Tr. 8517).

Sjb/ With respect to DL's acquisition of the municipal systems of Etna and Sharpsburg, whicn took place prior to September 1, 1965, the Department believes that the Licensing Board committed error by denying discovery. and excluding evidence of anticompetitive activities occurring prior to 1965. since the record demonstrates that such activities have contributed to a presently existing situa-tion inconsistent with tne antitrQst laws. DJ 255 evidences DL's ref usals to sell firm wholesale power to Etna and Sharpsburg.

86

more than suf ficient to finance current operations and debt service costs between 1955 and 1964 (App. 120,.p. 9) and substantial capital improvements had been made between 1961 and'1964 (Flynn Tr. 12,370; App. 120, p. 16). A consulting engineer who surveyed the system to dstermine its condition (Tr. 12,316) concluded that no expenditures were required to rehabilitate the system's generation ( App. 120, pp. 20-23) and only S25,000 was required to repair certain distribu-tion facilities. [6/ This could have been paid out' of Aspinwall's 1965 surplus (App. 120, p. 18; Flynn Tr. 12,369). 57/

7.13 Having been denied access to coordinated operation and development, Aspinwall faced the prospect of continued isolated 56/ The preparers of this report were satisfied tha t the infor-mation given to them by the consulting. ngineer was accurate (Tr. 12,316).

57/ The testimony of DL's witne$ses cor.c]rning the condition of '

Aspinwall's system was confused and if-contradictory. After

• stating that municipal systems are . :.nerally reluctant to spend money on maintenance, Mr. Sedlak, who co-authored the report con-taining the data set out above, said ,that Aspiawall was one of the best municipal systems from this standpoint (Tr. 12,325). He also testified that Aspinwall's failure to spend the required money on replacement of obsolete. equipment and maintenance had led to the deteriorating conditionoot the system (Tr. 12,326-27). This posi-

. tion is emphatically contradicted by his report (App. 120) which recommended no expenditures for maintenance or replacement of gen-eratin.; equipment and only limited replacement of distribution facilities. Mr. Scolak admitted that he had no expertise in this area (Tr. 12,316).

Mr. Flynn, the report's other co-author, testified erron-eously on other' sections of the report. He stated that Aspin-wall had unwisely purchased a generating unit which had only four years of service left (Tr. 12,376) when, in fact, the unit had only been used for four years (App. 120, p. 4). Mr.

Flynn noted the deterioration of Aspinwall's switch gear system (Tr. 12,376), but the report found tha t system to be well maintained (App. 120, p. 5). -

87

^

4 generation, the . projected cost of which was substantial due to rapid

- increases in operating costs and the absence of economies of scale (App. 120, pp. 8-23, 26, 29). Indeed, it was estimated that new gen-eration would cost Aspinwall $225 per kw (App. 120, pp. 22-23) at a time when DL had just put a jointly-owned large scale unit on line at a cost of $123 per kw (DJ 638, p 432a-1) and when DL's average system imbedded cost of generation and transmission was about $181 per kw (DJ 638, p. 402, 1. 42 (column g divided by DL's total gen-erating capacity.)) The only alternative lef t open to Aspinwall was to sell the system 'to DL; this sale occurred on June 29, 1967 1

l (NRC 158, p. DL-28). 58/ . .

' 5 8 /. To the extent that Applicants may urge that dif fering conclu-sIons should tie drawn f rom the Pennsylvania Economy League study i (App. 120), the following points should be taken into account:

l 1. Institutional Bias. It is supported primarily by contri-l butions (Tr. 12,300) and DL has been a major contributor since at i least 1959 and the League's seventh largest contributor every year since 1967 (DJ 629-30; Sedlak Tr. 12,347-53). Contributors elect .

the League's directors (Tr. 12,353). Since 1961, DL's president has sat continuously on the Executive Committee of the League's Western Division (DJ 631), the very body which' reviews Leeque reports (Tr.

12,320). League staff therefore never knew when their reports will be revinwed by an interested company (See, e.g., Tr. 12,320-23).

Since 196u. the League has inevitably recommended the sale of munic-ipal systems (Tr. 12,358-59). It is hardly surprising that DL pushed Pitcairn to request a League study (DJ 242-43) or that League studies were considered an important part of DL's overall acquisition plan (DJ 321). Neither of the report's

2. . Incompetence of League Personnel.

co-authors .had educational or work experience related -to electrical engineering (Tr. 12,295-97, 12,312, 12,344-45, 12,361). Tne consult-ing engineer who helped prepare the report was not presented for

-cross-examination (Tr. 12,312-16). Indeed, the engineer's evalua-tion of the system dif fered ' markedly f rom what nessrs. : nn and Sedlack' understood the report to say. Only one per cent of the League's reports have dealt with electric systems (Tr. 12,303-04).

'3. Underlying Assumptions. DL supplied information to the League for. the report (DJ 168-69). (Although the League staf f ,

was allegedly unaware of such contacts (Tr. 12,317-18)). The

~ ranc.c did not consicer any bulk power supply alternative except tsolateu; genera

• ion (Tr.- 12,362-65); interconnection, purchase of' firm power a. wholesale, joint ownership of generation, or

! economies or scale were omitted from consideration (Tr. 12,381-86).

88 w _, _ _ _ _ _ _ _ - - - - _ _ ._. . . . - "i _

7.14 DL continued to employ this tactic of refusing to engage in coordinated operation and development in its attempt to acquire its only surviving municipal competitor. In July 1966, DL's repre-sentatives, with the knowledge of the Company's chief executive, indicated to Pitcairn that DL sought to acquire the municipal system, rather than engage in coordinated operation with it (DJ 242-43). -

7.15 In December 1966, Mr. Fleger, President of DL, wa5 informed that it was Mr. O' Nan's 59/ opinion that " careful handl-ing" .of Pitcairn's requests fo't coordinated operation could induce Pitcairn to sell the -system; Mr. Gilfillian 60/ agreed that ,

the ' acquisition "would clean up the remaining . municipal electric system in our service area" 4J 245). The next day, Mr. Fleger agreed- that DL should try to acquire Pitciarn and suggested that the same procecure followed in acquiring Aspinwall be used (DJ 246). ,

59/ Mr. O'. fan was DL's Manager of Governmental Sales and was directly r":sponsible for dealing with :unicip 1 systems (Tr.

5490). .

60/ Mr. ( il fillian was then and is now t Vi<e President of DL (Tr. 54907.

9 89

7.16 Thereafter, DL repeatedly brought up the subject of acquiring Pitcairn in conversations with Mr. McCabe concerning the municipal system's requests for coordinated operation and development (ticCabe Tr. 1684-85, 1751; NRC 13), and even suggested to him that sale of the system would involve a large legal fee (McCabe Tr. 1684-85, 1751). Approaches by DL were made to members of City Council (McCabe Tr. 1686; NRC 57; DJ 248) and other Pitcairn representatives (DJ 251).

7.17 DL's repeated refusals placed Pitcairn in an isolated generating position (McCabe Tr.1652) which detracted from system reliability and eliminated the opportunity to benefit The municipal system from economies of scale (McCabe Tr. 1653).

escaped the intended acquisition only by filing suit against DL in two forums (McCabe Tr. 1647, 1653-54; Finding 7.04).

7.18 DL has misused its dominance and monopoly power (Find-ings 5.01-5.05) to deny actual and potential competing utilities the benefits of coordinated operation and development (Findings ,

7.01-7.09) and to eliminate competition in the relevant market (Findings 7.01-7.17). This misuse is vioin tive of and incon sistent'with the antitrust laws and , cons *1tutes an existin-i situation inconsistent with the antitrust laws (Conclusi>

L-10 through L-43).

' 90

3e Ohio Edison Company and Pennsylvania Power Company 61/

a. Coordinated Operation and Development

.8.01 OE has used a joint power supply study with the Wholesale Consumers o'f Ohio Edison ("WCOE") 62/ in order to deny. the members of WCOE f.he benefits of coordinated operation and development and to eliminate competition with those systems (Findings 8.02-8.05).

d.02 During negotiations in conjunction with the joint power supply study, OE conditioned access to nuclear facilities on the imposition of anticompetitive restraints on WCOE's use of any power obtained from those units. OE prohibited the resale of nuclear and .other capacity par ticipa ted in by WCOE by requiring that base load capacity in excess of WCOE's needs be made available to OE, apparently without, compensation (Cheeseman Tr. '12,169, 12,171; Firestone Tr. 11,282-83). 63/ This had the effect of denying WCOE

~

tbc be'nefits of coordinated operation and development with systems outside of OE's service area. .

8.03 OE further denied the members of WCOE the benefits of coordinated operation and development among themselves and with systems located outside of OE's service crea by refusing to engage 61/ Because of the common ownership and policies of OE and PPC, as well as their integrated operation, their exclusionary activities are set forth collectively. See Finding 1.07 S2/ GCOE is a group composed' of municipal electric systems which have wEolesale power contracts with OE (Lyren Tr. 1883). WCOE was formed in 1972 to fight a wholesale rate increase filed at the FPC by OE (Lyren Tr. 1885). As part of the settlement of that case, OE agreed to study a new bulk power supply arrangement with WCOE (Lyren Tr. 1886).

63/ Such a limitation on resale. is also the natural result of OE's ref usal to engage in third party wheeling (see Finding 8.03).

This restriction on resale was also included in a proposal made by OE (NhC 44 (February 28, 1975 letter, p. 3, V 7)).

91 w

in third party wheeling for the municipal systems which make up t

WCOE. In 1972, Ohio Edison refused to consider third-party wheeling as a part of coordinated operation and development with WCOE (White Tr. 9593), although such wheeling is necessary for municipal systems to derive the full benefits of coordinated operation and development (Kampmeier DJ 450, pp. 3d-39, Tr. 6079-81; Mayben Tr. 12,576).

8.04 In 1974, in response to a specific WCOE request for wheel-ing-(Whi~te Tr. 9598; NRC 31-32) and the naming of specific sources of power available to WCOE (DJ 628; Cheeseman Tr. 12,182),

OE again refused to consider third-party wheeling (Cheeseman Tr.

12,162-63', 12,257; Mayben Tr. 12,560-61; Lyren Tr. 1905; White Tr.

9600-01; NRC 32; DJ 440). 64/,

In subse'quent meetings between representatives of WCOE and OE, . requests for third-party wheeling of pouer" f rom specific sources were again rejected by OE (Cheeseman Tr. 12,250; Firestone Tr. 11,307). 65/ ' OE also ' refused to transport 64/ WCOE's belief that third-party whseling was to be included In the joint power supply study was based on meetings with OE, documents that had been received by WCOE, and the FPC settlement agreement itself (Mayben Tr. 12,530; Cheeseman Tr. 12,191).

65/ Mr. White testified that OE was unwilling to make a general commitment to wheeling , but would have considered a specific request for wheeling on its merits. Even absent the evidence of record which shows that WCOE discussed specific sources of power with OE, Mr. White's professions that a specific wheeling request would have been considered lack credence. Despite numerous discus-sions of third-party wheeling with WCOE, Mr. White never informed hCOE of nis purported position (White 9706-07). Nor did WCOE have any reason to believe that specific proposals for wheeling would have been considered outside of the scope of the study (Cheeseman Tr. 12,180-81). Indeed, the only specific requests ever received by OE were denied (see Finding 8.08).

92

i: .  : .

k

!. power between WCOE members (Cheeseman Tr.. 12,166-67), or from WCOE members to other electric utilities (Mayben Tr.12,570) . 66/

8.05 OE's use of _ the study as a vehicle for restricting the

' growth and' competitive ' viability of the WCOE members is further demonstrated by OE's anticompetitive proposals for a joint power supply plan. Had these proposcis been accepted, they would have i-restricted the growth and competitive viability of the municipal-systems by: imposing upon WCOE an unduly burdensome and costly

) method of reserve allocation (NRC 44 (February 28, 1975 letter,

p. 2,1 "2";. p. 3,1 "7.b"); Cheeseman T*; . 12,158); limiting the

) extent of mu'n icipal participation in OE generating units 67/ (NRC 4

44-(February 28, 1975 letter, p. 2, 1 ",1"; June 17, 1975 letter, p.

2, 1 "2")); limiting the smount of energy that WCOE could obtain f rom any 0E plant notwithstanding the amount of WCOE's contribu-i

tion for capacity (NRC 44 (June 17, 1975 letter, p. 2, 1 "4")); 68/

requiring- WCOE to split, with OE'any savings resulting from WCOE's l lower financing costs (NRC 44 (June 17, 1975 letter, p. 4, 1

66/ Because -the scope of the power supply study was so severely restricted by OC, the recommended prepayment plan was the only logical conclusion (Cheeseman Tr. 12,188). Thus, OE's continuous refusal to engage in - third party wheeling .lef t no option to WCOE

but a power supply plan which denied them the full benefits of 1- coordinated operation and development (Cheeseman Tr. 12,162-63, 12,172; 12,174; Mayben-Tr. 12,531-33, 12,576, 12,578).

-67/ Under OE's first proposal, which would have allowed WCOE to acquire capacity -in- 0E units at the rate' of 10 per cent of WCOE's

_ peak load per ' year (NKC'44 (February. 28, 1975 letter, p. 2, 1 "1")), it -would1 have required 30 years for WCOE to reach total self-

. generation 1 (Cheeseman Tr.;12,217; NRC 44, p. V-6).

68/- Under OE's proposed formula, there was-no direct relationship i- between the capacity

• acquired. by WCOE and the energy ava'ilable to it from: tnose units in which it naa acquired capacity; such. a rela-tionship usually exists (giayben Tr'. ~12,571-72) .

93 .

1 "5")); 69/ and leaving OE with absolute control over WCOE's bulk power supply (NRC 44 (June 17, 1975 letter)).

8.06 OE also denied the benefits of coordinated operation and dev'elopment to the ' only municipal system .in its area which is not a member of WCOE, by refusing to engage in third party wheeling for Orrville. In 1973, OE ref used to consider entering into an arrangement with Orrville for the transmission of power by OE

.either to or f rom Orrville (Lewis Tr. 7958-59, 11,340-41, 11,444; App. 180). This refusal further eliminated the possibility of coordinated operation between Orrville and members of AMP-0 located within OE's service area (Lewis Tr. 7959) .

8.07 Between 1958 and 1970, OE's wholesale contracts with the cooperative distribution systems located within its service area contained a provision which prohibited the cooperatives from re-selling at wholesale the power purchased from OE (LJ 17-23, 1 "3"),

thus eliminating competition by the cooperatives for OE's wholesale customers. This elimination of wholesale competition was perpetuated ny the OE-Ohio PoiNc contract which provided for the delivery of Buckeye power to the member cooper.atives located within OE's service area'(NRC 190, pp. 1 (1 beginning " Delivery Points Energy") -4, pp. 9-10 (ending 1 "14"); Findings 9.15'-9.19).

8.08 Beginning in at least 1965, Ohio. Edison refused a specific request to wheel power from Buckeye Power, Inc. to Buckeye's member distribution cooperatives (White Tr. 9554-56, 9607, 9725-26; DJ 532). OE refused to sign the Power -Delivery Agreement and, not

.until June 20, 1968,'six months after the Power Delivery Agreement .

69/. This would have resulted -in an adoitional cost to WCOE and an uRearnea benetit to OE (Cncese.aan Tr . 12,243-44).

94 ,

i was signed (NRC 188), did it enter an agreement with Ohio Power, which provided for the delivery of Buckeye power to the member cooperatives located within OE's service area (DJ 507, p. 16).

Testimony that this refusal was due to insufficient compensation under the Power Delivery Agreement (Whi.te Tr. 9555-56) is in conflict with the company's representations to Buckeye that OE might receive les.s revenue under tne agreement with Ohio Power than under the Power Delivery Agreemeit ( DJ 532). OE's refusal to wheel Buckeye power pursuant to the Power Delivery Agreement resulted in the elimination of Buckeye as a source of bulk power supply for the cooperative.

distribution systems located within OE's service area for a period of at least six months (DJ 616; DJ 136, p. 4).

8.09 OE has denied the benefits of coordinated operation and

• development to the municipal systems and cooperatives located within its service area by entering into territorial agreements with other generating entities, thereby eliminating competition in supplying bulk power to those municipalities and cooperatives; these agreements have had the further effect of eliminating' competition in the sale of power at retail. Beginning in at least 1965, OE entered into and enforced territorial agreements with Ohio Powet Company (DJ 519-21, 523-31, DJ 200, Attachment 3; TE (DJ 513-17, 5'19, 533-35, 537-40), and Dayton Power and Light Company (DJ 519). OE ale? attempted, in 1966, to negotiate a territorial allocation agreement with Columbus and Southern Ohio Edison Company (DJ 51d-19) . These territorial agree-ments took the form of " confidential" territorial maps (DJ 513, 515-

-16, 519, 534-35, 537-40), which were signed by the highest officers

( of the company (DJ 516), constantly updated (DJ 517, 523, 528-29, 531), ana used in the day to cay operations of the company (DJ 95 e

. f 519).'70/ Concurrently with these agreements, OE entered a customer allocation agreement with Ohio Power Company relating to the coopera-tive distribution systems located in OE's service area (DJ 490).

8.10 There is no reason to believe .that the companies with which OE had .these allocation agreements have ever ceased adhering to them. 71/ OE took .no action which would have had the ef fect of either informing its market allocation partners that OE was with-drawing f rom the agreements or of causi'ng its partners to cease adherence to the terms of the agreements (White Tr. 9750, 9752). 72/

8.11 OE's wholesale municipal contracts were for ten year terms, (DJ 44-65, 1 "1") which unreasonably restrained the ability of muni-cipal systems to obtain alternate sources of bulk power. 73/ A term of 70/ Mr. White's statement that the territorial maps were made solely to determine the feasinility of a territorial integrity law raises a question as to his m'emory on this subject. Mr. White was himself the recipient of the notes of a " Fringe Territory Meeting" which was concerned with the implementation of the OE-Ohio Power agreement

( DJ 525). Mr. Mansfield, with whom Mr. White had f requent discus-sions (White Tr. 9546), participated in a map signing ceremony (DJ 516), attended a . meeting on territorial problems (DJ 527) and received a memorandum which stated the use to which the maps were actually being put and reported that representatives of Columbus and Southern Ohio Edison felt that the map agreements were illegal as did members of the PUCO to whom they had spoken (DJ 519).

71/ Although Mr. White testified that OE has no territorial agree-ments today, his knowledge on this point is questionable since he was unaware of OS's unwritten territorial allocation agreement with Newton Falls (Craig Tr. 2910-11; White Tr. 9696).

72/ Mr. Uhite did not make a strong effort to eliminate adherance to territori,al agreements within his own company; his only action toward this end was a verbal communication to Mr. Zimmerman who was then to communicate with the Division Managers (White Tr. 9747-4d).

There is no evidence that OE is no longer engaging in horizontal

. market allocations with its competitors.

73/ Some of. these contracts allowed cancellation upon two years ..

notice if the municipality became totally self generating. This'is not a feasible alternative because of the barriers to a one-step entry into complete celt generation tot a small isolated municipal system (DJ 443; DJ 450, pp. 16-21; Lyren Tr. 2041-42).

96 e

. . l

, ten years is not necessary to protect OE's investment in facilities (Mayben Tr. 7807-09; Kampmeier Tr. 5827-28, 5972-73). 74/ Indeed, OE's contracts with its industrial customers, some of which have loads larger than the total load of all OE's municipal customers, are for renewable one-year terms (White Tr. 9717) .

8.12 PPC refused to provide maintenance power to Grove City, thereby denying Grove City the benefits of coordinated operation and development. This refusal to provide maintenan,ce power was motivated by an intent to acquire

• and led to the elimination of

. Grove City as a generating system. In 1965, Grove City's genera-tion- facilities were in poor condition and needed to be repaired (Allen Tr. 4767). Contemporaneously, Grove City requested that' PPC provide partial requirements power so that the Borough could perform maintencnce on its generating equipment (Allen Tr.'4768). Grove City received a negative responsd (Allen Tr. 4774) and was told by PPC that such a purchase would not be to its advantage (Allen Tr. "

4775). Unable to repair its generation, Grove City felt it had no alternative but to purchase all of its power from PPC (Allen Tr.

4786, 4791). 75/ After denying Grove City's request for partial requirements power, PPC proposed that Grove City lease its system to PPC for a 30-year term (Allen Tr. 4h77-78; DJ 501). In 1967, Grove City was forced to cease generating and became a full require-ments wholesale customer of PPC (Allen Tr. 4763, 4767; NRC 107).

74/ For a discussion of the record on this subject, see Response at page 20, which is hereby incorporated by reference.

75/ Because a 1959 request for power had been denied, Grove City a id not believe that it would be fruitful to request partial requirements power from tiest Penn Power (Allen Tr. 4775-77).

97

. + . .

b. Foreclosure of Retail Competition

' 8.13 OE enter'ed into and enforced territorial and customer allo-cation provisions in contracts with its municipal wholesale customers, thereby eliminating retail competition.~trior to 1966, OE's contracts with its municipal wholesale customers contained provisions which all?cated customers and territories (DJ 24-43) . The majority of these contracts gave OE tne right to serve any new industrial customer having a peak load in excess of a specified small amount of power ranging from 50 kva to 150 kva (DJ 25, 31-33, 35, 38, 41, 42). Thus, in 1965, OE had anticompetitively . established an absolute right

, to serve all. significant industrial customers, thereby foreclosing competition for these customers.

8.14 This anticompetitive ' restraint was perpetuated by OE's

'1965 municipal wholesale contracts. These contracts, in existence until 1973, prohibited a municipal system from serving, without the consent of the company: any customers served by OE; any residential and commercial customers within the municipality which could be ,

easily servc5 by OE 76/, and any customers outside of the municipality not easily served by aa municipality 77/ (DJ 44-62, rate schedule, 1 "Other"; DJ 63-65,1 "8"). OE the.reby eliminated competition for all existing inaustrial loads, and for virtually all new industrial loads locating outsiae the boundaries df the municipality. The con-tracts co'ntaineo comparable competitive restraints on the company (DJ 44-62 1 "4"; DJ 63-65,1 "7").

76/ This prohibition gave OE the right to serve any residential or com.mercial customers locatea within the municipality which could be served by OE without an extension of its primary distrioution facilities.

77/ This prohibition gave OE the right to serve any customer outside tne municipality wnich the municipality could not serve.without ex teno ing its primary aistribution facilities.

9o

8.15 Ohio Edison enforced these contracts by either refusing the municipality's request to serve a customer (Lyren Tr. 2246-47; DJ 406-09, 413) or by conditioning permission .to se'rve on an exchange of customers (Lyren Tr. 1926, 1940; DJ 412, 414, 457-60; 462-75, 481-82; NAC 60-64). 78/ The existence of the restrictive contract pr'ovisions and the knowledge that the municipal system would have to give up customers in order to serve new customers had a chilling ef fect on the municipal systems' desire and ability to compete with OE (Lyren 2246, 2253, 2266-67).

6.16 Under these contracts, OE not only prevented municipal com-petition during the 10' year term of the contracts, but, by surrounding the municipalities with OE distribution lines, permanently pre-empted the ability of the munic'ipal utilities to competitively extend their systems (DJ 410, 616; White Tr. 9719-20). By 1973, ,when the anticom-petitive provisions were . eliminated f rom the contract, 79/ the cumulative effect of decades of contractual restraints on market structure was so pervasive that OE was not aware of a noticeable increase in competition (White Tr. 9537'). There is also evidence tnat the restrictive contract provisions have been perpetuated by less formal agreements (Craig Tr. 2910-11).

78/ OE a ttempted to enforce these restrictive provisions against Cuyahoga alls even after they had been cancelled ( DJ 486-8]).

79/ Although Mr. White testified tha t the anticompetitive provisions were eliminated because of an increased awareness of the antitrust laws and the irritating ef fect of seldom-used provisions, it is clear that OE's primary impetus was tne fear that the restrictive provisions binding the municipalities (located in the rate schedules) would ba eliminated when 08 sought a rate increase, while the re-straints binding the company (located in the main body uof the con .

tract)_would remain unchanged ( DJ 613; hhite Tr. 9672-76); OE had "outsmartea" itself (DJ 613). Antitrust considerations did not cause PeC to eli.hina te the co:nparaole provisions in its municipal wholesale contracts'at tnat time (anite Tr. v635; see Finding 1.07).

99 l

8.17 PPC also entered into and enforced territorial and cus-tomer allocation provisions with its municipal wholesale customers, thereby eliminating retail competition. Prior to 1966, PPC 's con-tracts with its municipal wholesale customers contained restraints on alienation which prevented those municipal systems from competing for industrial loads by limiting the use of the power purchased under the contracts to municipal purposes and resale to residential

(" domestic") and commercial customers (DJ 67-70) .

8.18'These anticompetitive restraints were per.petuated by PPC's municipal wholesale contracts in 'effect in and after 1966. These contracts prohibited the municipalities from serving, without the consent of the company, any customers presently served by PPC (NRC 106, NRC 108-10, 1 "4";.aJ 584), thereby eliminating competition for all existing industrial loads. This elimination of competition was intended by PPC -- Ellwood City, which had the ability to serve additional customers'(Urian Tr. A968), was told by PPC during the discussions surrounding the 1966 contract, 80/ that it could not ask to serve industrial customers dur.ing the term of the contract (Luxenberg Tr. 6400). 81/

8.19 These 1966 contracts have' had a chilling ef fect on the municipal systems' ability to compete for and serve industrial customers (Allen Tr. 4766; Urian Tr. 4971). PPC presently serves 80/ As an alternative to purchasing power from PPC, Ellwood City, in 1966, requested wholesale power f rom DL (Luxenberg Tr. 6060, 6403-06, 6418). This request was denied (Luxenberg Tr. 6403-06, 6418). Fst a complete discussion, see Response at pages 4-5.

81/ As part of the 1966 contract negotiations, Ellwood City and PFC entered into a Letter Agreement which gave Ellwood City the right to ask for permission to serve certain named residential

, and commercial customers (DJ 71; Urian Tr. 4991-92). EIfwood City subsequently requested permission to serve these customers, and PPC granted that permission (App. 87-80).

100

(

all large retail customers in those municipalities to which it sells power at wholesale (DJ 503, pp. 2'11653-54). Although PPC propocas to eliminate these restraints when the contracts expire, the ef fect of these anticompetitive provisions, combined with the effect of the earlier restrictive contracts, has already served to increase and maintain PPC's dominance and monopoly power within its service area.

8.20 From 1961 until at least 1967, OE and Holmes Wayne Rural Electric Cooperative engaged in a territorial allocation agreement which limited retail competition (DJ 522).-

8.21 Since the mid-1960's, OE has had an agreement with CEI that restricts competition between the two with respect to new cus-tomers (Finding 6.24). OE also has territorial agreements restricting retail competition with TE, Ohio Power Company and Dayton Power and Light Company (Findings 8.09-8.10).

t 8.22 OE has sought to limit the growth and. competitive ability of its municipal wholesale customers by limiting the amount of capacity available to them. In 1975, OE limited the total amount of of capacity that Newton Falls could obtain under its wholesale power contract (App. 34; Craig Tr. 2876-77, 2968) and, in consideration for its agreement to upgrade Niles' service from 23 kv to 138 kv, sought to limit the amount of power Niles could obtain under its wholesale contract (NRC 217).

8.23 Under these capacity limitations, the municipal system would be unable to obtain capacity above a specified amount without OE's consent (App. 34; NRC 217). Such limitations would have a chilling effect on. the ability of the municipality to compete with OE for industrial customers (Craig Tr. 2926-A), since the 101

municipality would be unable to guarantee that it would have sufficient capacity to serve the industrial loads. Capacity limitations were not included in OE's 1965 wholesale contracts (DJ 44-65); it was not until OE had " outsmarted" itsel f ( DJ 613 ) and was forced to eliminate the restrictive allocation provisions from the 1965 contracts that it felt the need to require a capacity limitation provision which would restrict the ' growth dnd competitive ability of the municipal systems. 82/ .

8.24 OE and PPC limited the competiti'v e ability of their

~ municipal wholesale customers by refusing to set and supply to the municipal systems a discount rate for high voltage service

( DJ 419 and.421; White Tr. 9576-77; Urian Tr. 4977-79).

8.25 By taking power at a high voltage, a municipal system is better able to compete with its wholesale supplier (Urian Tr. 4978).

A municipal customer , however , cannot incur the debt necessary to build f acilities to take. power at a high voltage without knowing in advance what the rate for that power would be (Urian Tr. 4979-80, 5000-01). 83/ While OE referred inquiring municipal systems to its 82/ OE's assertion that capacity restrictions were imposed to pro-tect OE's system against a sudden increase in municipal load is contradicted not only by the fact that such restrictions were not included 'in OE's 1965 contracts, but by the fact that in 1976, after Mr. Craig of Newton Falls had testified in this proceeding (Craig Tr. 2851-52, 2876-77), OE was able to devise a contractual provision which enabled it to protect its system without restricting municipal growth (dRC 21b; App. 230-31).

83/ Not only would it be impracticr1 to undertake substantial system alterations without the assurance that those alterations are financially justified, but in Pennsylvania, a municipality cannot legally enter into a debt unless it is able to show it can ootain revenues to support that debt (Urian Tr. 4979-80).

l 102 e

retail industrial. rate as an indication of what the municipal dis-count might be, it would not guarantee that discount and stated that it might be appropriate to design a wholly new municipal wholesale rate, rather than taking the existing rate and applying a discount (DJ 419, 421; White Tr. 9737-38). Nor did PPC give inquiring municipal systems any indication of the level of a high voltage rate (Urian Tr. 5002-03; Luxe: ; erg Tr. 6410).

8.25 While Applicants conduct should be measured against the standards of the antitrust laws and not the Federal ' Power Act, 84/

it should be noted that the Federal Power Commission held that PPC should " publish and make effective" a rate for high voltage service

( DJ 626, pp. 3-4, 6, 10-11; IXT .6 27 ) . The FPC further ordered that

.this rate, effectively a' percentage discount, could be changed only in the event of a general rate filing which altered, the charge for the primary service upon which the disc'ount was based (DJ 626, p. 10; DJ 627). .

. 26 OE and PPC have restricted the ability of their wholesale municipal customers to compete with them for industrial customers by setting their retail industrial power rates lower than their municipal wholesale power rates (Kampmeier DJ 450, pp. 34-35; Craig Tr. 2953; Lyren Tr. 2046). Such rates involve sales below cost (Wein Tr. 7165-69), rather than any competitively proper allocation of cost of service (Ge'rber Tr. 11,469-70).  ;

)

8.27 Although wholesale and retail rates are regulated, rate-making is an inexact science comprised of numerous cost allocation methods (Kampmeier Tr. 6126-6131; Hughes Tr. 4128; DJ 4 5 5 ; App .

163-65), all of which yield different results (Wilson Tr. 11,102; DJ 455; Kampmeier Tr. 6129).-Further, the FPC, which approves 64/ 'See Response at pages 23-24 103 P

wholesale rates, and the state commissions, which approve retail ra te.s', , have di f ferent standards for measuring and approving rates (Wilson Tr. 10,998); neither agency takes into consideration the allocations made by the other (Wilson Tr. 11,118-19; Wein Tr.

6661-62). The flexibility inherent in rate setting is further evidenced by the fact rates may be, and are the subject of bargaining and negotiation (Wilson Tr. 11,017-19, 11,089-90). 85/ See also Findings 3.01-3,02, 9.26.

8.28 Even assuming that an industrial load would be paid for by .the municipal system in the lowest wholesale rate block, 86/

which could only occur when a municipal system received all its 85/ In at least one instance, 0E contemplated proposing what the company felt to be a high municipal wholesale rate as a bargaining tool (DJ 624).

86/ App.167 and 168 and' the testimony presented by Mr. Ailson con-Sain certain flaws which makes their probity subject to question:

1. They do not take into consideration any costs other than power supply which would be incurred by a municipal serving an indus-try (Wilson Tr. 11,130, 11,077), although OE's industrial rate includes such costs (Wilson Tr. 11,130).

2. A change in the load factor of the industrials studied would change the results of the studies (Wilson Tr.11,129) .

3. The industrial rate used for comparison in App. 167 is a proposed industrial rate which is 30% higher than the current industrial rate (dilson Tr. 11,036).

4. App.167 is based on the municipal bill for the month of April (Wilson Tr. 11,063), which month is neither part of the munic-ipals summer or winter peak (Wilson Tr. 11,123). A study based on a month in which the municipal is experiencing its peak might well show different results.

5. HOE's retail industrial and wholesale rates contain fuel adjustment clauses. The fuel charge is not the same for the retail and wholesale rates; nor is the differential between the two f uel clauses the same from month to month (Wilson Tr. 11,128-29).

Because of the variation in the fuel charges, a study of a month other than April, might show different results.

6. App.168 does not show the effect of the load of Ohio Brass

.on dadsworth in the summer, the time of year when the muni,cipal and industrial peaks are . coincident (Wilson Tr. 11,123).

7. Tne stuales performed by Mr. Wilson dealt with three of the four largest of OS's twenty municipal customers (Wilson Tr.

11,137-38; NRC 165, p. 412). The revenue margin obtained by a smaller municipal system serving a new industrial load could be consiaerably sraaller or nonexistent (Wilson Tr. 11,068-73).

104 4

power at a single delivery point, 87/ a price squeeze could still occur. A price squeeze is defined as " imposing an unacceptable level of profit or actual loss on a competitor by narrowing or eliminating the difference between revenue derived from final

- product sales and costs" (Wein DJ 587, p'. 158). If the municipality were paying more for power than was cost justified, it would still be subject to a price squeeze, notwithstanding its ability to

.make a profit under some circumstances (Kampmeier Tr. 6021, 6135-36).

Were the municipal system not subject to such a price squeeze, its net revenues, and its ability to compete, would be even greater (Kampmeier Tr. 6022).

c. Acquisition ,

I .8.29 OE and PPC have misused their dominance and market power to eliminate competition by acquiring competing municipal systems.

Both Applicants are products of mergers and acquisitions (Findings 1.06-1.08). It has been the policy of both companies to acquire municipal systems (DJ 423; DJ 480, p. 26 (rejected); Finding 1.07) and, since 1965, OE has acquired. the municipal systems of Lowellville, Norwalk, Hiram and East Palestine.(Wein DJ 587, p. 67; White Tr.

9541), 88/ while PPC has attempted to a' cquire the municipal system 87/ If it were. necessary for the municipality to install a second delivery point in order to obtain additional power, the two delivery points would'be separate accounts (Firestone Tr. 11,319-20). In such a case,, power received at the additional delivery point would be billed in the highest rate blocks.

88/ Tho' "public' interest" standard employed by the Securities and 1

, Exchange Commission to examine ~ an acquisition under the Public l Utilities Holding Company.Act of 1935, 15 U.S.C. SS 79 et seg.

' hardly amounts to a rigorous antitrust analysis.

J 105 e

l of Grove City (Finding 8.12). Illustrative of OE's policy was the acquisition of Norwalk. OE was willing to purchase Norwalk's generation facilities only if Norwalk also sold its distribution f acilities (DJ 429, 433-34). 89/ OE also told Norwalk that if the plant were shut down, OE would not bid on it in the future (DJ 429), thereby using its monopoly power to eliminate one of the options -- that is, becoming a distribution system -- otherwise open to Norwalk.

8.30 OE and PPC have misused their dominance and monopoly power (Findings 5.01-5.05) to deny actual and potential competing utilities the benefits of coordinated operation and development (Findings 8.01-8.12) and to eliminate cors etition in the relevant markets (Findings 8.01-8.29).

This misuse is violative of and inconsistent-with the antitrust laws and constitutes an existing situation inconsistent with the antitrust laws (Conclusions L-10 through L-44).

4 The Toledo Edision Comoany

a. Coordinated Operation and Development 9.01 TE has misused its dominance and market power to deny the benefits of coordinated operation and development to its competitor by repeatedly ref using to sell firm power at wholesale to Water-ville. In 1966, TE knew that Waterville was an isolated, self-generating municipal system which was having problems with reliability and voltage variations (Cloer DJ 582, p. 12) and had reached a critical condition where it was unable to supply all of its industrial customers with power on certain days (DJ 615). At 89/ The coal-fired steam units which belonged to Norwalk are still being used on OE's system and are listed as OE generation on the company's system map'(App. 172; Firestone Tr. 11,180).

106

that . time, Waterville informed TE it was interested in negotiating for a bulk power supply on a long-term basis (DJ 615). At a

. November 8, 1966 meeting, TE's spokesman 90/ informed Mr. Bucher of the Waterville Board of Public Affairs (bJ 504) that it was TE's intent not to interconnect with and sell firm wholesale power to Waterville in an attempt to force the sale of the system but that, as a political tactic, TE would publicly announce other reasons for its conduct (DJ 504). 91/

9.02 At a March 1967 public meeting, TE's spok'esman again stated that the company would not sell firm power at wholesale to Waterville (DJ 619). In June 1967, Waterville's consulting engineers again requested that. TE sell Waterville either full or partial . requirements ' firm wholesale power (DJ 505); TE again refused (DJ 506). 92/ .

9.03 TE has used its dominance and market power to deny Napoleon access to coordinated operation and development. In meetings on September 2, 1971, and March 6, 1972, called for the announced purpose of examining future' bulk power supply alternatives 90/ Mr. Cloer was TE's spokesman in the company's dealings with Eaterville (Cloer DJ 582, p. 7), as well as TE's District Manager (Cloer DJ 582, p. 4; DJ 13 8 , p . 1 ) . -

91/ A memorandum of this meeting, which expressly and concisely spelled out TE's position on Waterville, was sent by Mr. Cloer to cir. Schwalbert, who at that time was Assistant to the Senior Vice President and General Manager (DJ 138, p. 1).

92/ TE's arguments that these refusals were nc- proven because TI) the Department did not present a live witness, (2) the request was informal and unauthorized (although this was not given as a reason for the refusal, see DJ 506), (3) the november 8, 1966, meeting was informal ar.3 nonpublic, and (4). the Waterville system was sold after a public election, have been fully answered at pages 25-26 of the Response, which are hereby incorporated by reference.

107

for Napoleon (Moran Tr. 9843), 93/ TE's representatives 94/ refused requests by Mr. Lewis, Napoleon's consulting engineer (Lewis Tr.

5606-07), for access to large-scale generating facilities (NRC 127., pp. 6-8). 95/ The only qualification placed on these requests 93/ Mr. Moran's testimony concerning this and other matters con-tained numerous inconsistencies, erroneous statements, and glaring memory gaps. Mr. Moran changed his testimony twice on this topic.

He first stated that he did not recall this matter being discussed twice and could not recall at which meeting it was discussed (Moran Tr. 9857-58). He later testified that the discussion occurred at the first meeting (Moran Tr. 9915). Still later, he appeared to revert to his original testimony (Tr. 9940). In assigning weight to Mr. Moran's testimony, the following facts should also be taken into account: (1) He repeatedly confused the meetings referred to in NRC 127 (Moran Tr. 9940, 9942), and did not remember what was discussed (Moran Tr. 9857-58, 9917), no ting that the meetings were "a long way back" (Moran.Tr. 9914-15, see also Tr. 9924-26). (2) He misunderstood the legal framework within which TE operated. For example, he testified that the Ohio anti-pirating statute was a constitutional provision which applied to municipal electric systems-(Moran Tr. 10,053-56), when it is, in fact, a statutory provision (Statement of Counsel for Applicants Tr.10,054) which does not apply to municipal systems (Stipulation Tr. 6896-98). (3) He testi-fled that, as Vice Pret,ident in charge of TE's rate function (Moran Tr. 9920, 9828), he woilld not expect TE's wholesale contracts with smaller customers to have a 12-month ratchet clause (Moran Tr.

10,039), but all of TE's full requirements wholesale contracts con-tain such a clause (NBC 111-12, 114-20, 122-25) whether the customer is large like Bowling Green with a 33.1 mw peak or small like Haskins with a 0.35 mw peak (NRC 158, p. TE-14). See also footnotes 95, 99, 107, 115, 117, 120, 122, 125, 126 and 128, infra.

94/ Mr. Cloer, TE's District Manager, and Mr. Moran, a TE Vice President (DJ 134, p. 8).

95/ Mr. Lewis' affidavit (NRC 127) is clearly the best evidence of what happened at these two meetings. It was prepared by Mr. Lewis within 16 months of the meetings (in January 1973), from notes taken at the meetings (Lewis Tr. 5615-16). It was not prepared for litigation (Lewis Tr. 5619). Mr . Moran, on the other hand , ~ testified from memory over four years after the meetings, at a time when litigation was in progress.

The probative value of NRC 127 is further demonstrated by Mr. Moran's admission that Mr. Cloer made injudicious and inflam-matory remarks (Tr. 9941). TE's argument that Moran , not Cloer, was the Company's~ sole spokesman is belica by Horan's f ail n a to disagree with Cloer (Moran Tr. 9921), his failure to limit Cloec's authority (Moran Tr. 9921-22) and his failure to restrain Cloer (Moran Tr. 9941).

108 e

a

7 was'that the units would be greater than 300 to 400 mw in size (Lewis Tr. 5626). 96/ TE's proported willit.gness, since September 1974, to engage in discussions with Napoleon regarding joint gen-erating facilities 97/ has not resulted in any agreement that is of record. 98/

9.04 TE has misused its dominance and' market power to deny tre benefits of coordinated operation and development to the municipa '

systems and cooperatives located within its service area by entering

- into territorial agreements eith other generating entities, thereby eliminating competition in supplying bu,lk power to those municipal 96/ TE's argument that the request did. not encompass access to nuclear units is unsupported by the record. In any event, a re-fusal to grant access to fossil generation remains exclusionary conduct. .

97/ TE's apparent argument tha t its purported policy in 1974 (See 57 151; App. 253 and 254), during a period af ter this proceeding had com.nenced in response to adverse antitrust advice from the Attorney General, legitimates earlier refusals to engage in coordinated development is clearly wi';out substance. In addi-tien, TE's reliance on App. 253, whict. is nothing more than a solicitation letter containing unsubstantiated, self-serving statements, is misplaced. ,

98/ Indeed, TE's sincerity in this matter may be questioned since, II TE were to take part in such a joint venture, it would have to obtain the . approval from all CAPCO members (Schaf fer Tr. 8557) and CAPCO 'has not been notified of TE's purported willingness to enter a joint generation program with municipal systems (Moran Tr. 10,066-67).

109 e

and cooperative systems. 99/* Evidence of TE territorial agreements was destroyed in 1970 or 1971 at the di'rection of Mr. William Schwalbert, a TE Vice President (DJ 617). No evidence has been presented which indicates that these territorial agreements have been abandoned. (Findings 9.05-9.14.) ,

9.05 Beginning in at least 1965, TE entered into and enforced a territorial agreement with OE (Finding 8.09). 100/

9.06 TE and Ohio Power Company have had a territorial alloca-tion agreement since at least the early 1960's. Each of these companies has refused to sell power at wholesale to distribution systems which were being served by the other (DJ 512, Attach-ments 1-3 (rejected), 4, 4a, 4b, 5-7 (rejected), 8, 9 (rejected)). _

Contemporaneous with these refusals, the agreement was formalized by a t'erritorial map, which maf .have been prepared by TE as early as 1962 (DJ 536; Tr. 8123).

99/ Mr. Moran's testimony that he did not know of and probably would be aware of any territorial, agreements with other electric utilities (Tr. 9904-05) is hardly probative in view of the evidence of record, as well as his admissions that there may have been occa-sions when he was not aware of snch agreements (Moran Tr. 10,002-09) and that he was not close to district operat ons (Moran DJ 583,

p. 17). The person who_ was familiar with these agreements, Mr. Schwalbert, TE's Vice President for Districts (DJ 132, p. 8),

who ordered tne distruction of TE documents relating to territorial agreements ( DJ 617 ) and was present at a ;eremony where such agree-ments where signed by TE (DJ 516), did ..ut testify.

100/ Mr. Moran's testimony that there have been few opportunities tor competition Detween TE and OE (Tr. 9911) is disingenous. If few competitive opportunities existed between TE and OE, such an agreement would not have been required by the tw'o companies.

110 l

9.07 TE and Consumers Power Company (" Consumers"), which serves in Michigan in an area adjacent to that served by TE in Ohio, have been parties to a territorial allocation agreement since at least 1966 to the present. The existence of this agree-ment is suggested by and consonant with the wholesale contracts between the Southeast Michigan Rural Electric Cooperative 101/

(SE Michigan) and both TE and Consumers;. these contracts prohibit the resale or use of power purchased from one company by SE

, Michigan in the area served by the other company (DJ 16, pp.1, 4; DJ 107, pp. 4, 8). 102/

9.08 Other evidence of 'this agreement is TE's refusals to sell _

SE Michigan power in Ohio to serve the Michigan portion of its load. In 1965, SE Michigan requested that TE submit a proposal for the sale of power 'to the Coop e to serve the Michigan portion of the Coop load (DJ-1088), but TE refused (DJ 108A). .-

9.09 In February 1966, Messrs. Schwalbert and Keck of TE met' with representatives of SE Michigan and two Rural Electrification Administration representatives, Messrs. Darling and Badner, to discuss the cooperative's renewed request that TE sell it bulk 101/ SE tiichigan is located in southeastern Michigan and n6rthwestern Ohio ar.d has about 75% of its load in Michigan and 27% of its load in Ohio (DJ 86).

102/ The TE contract was superceded in 1968 by the Buckeye Agree-ments (See, Findings 9.15-9.19). In 1972, one such prohibition in the Consumers' contract (DJ 16, p. 4) was deleted (DJ 16, lith page), but the remaining restraint was not removed (DJ 16, p.

1).

111

power for use in Michigan (Darling Tr. 5188-90; DJ 108, Febr"uary 14-16 and February 14-17, 1966 Reports). 103/ A com-parison of the cost to SE Michigan of bulk power showed that TE would be the lowest cost supplier (Darling Tr. 5188-90; DJ 108, February 14-16 1966 Report).

9.10 TE refused, giving three reasons: (1) a desire to avoid FPC jurisdiction, (2) a conflict with a Buckeye Power agreement, 104/

and (3) a territorial agreement between TE and Consumers (DJ 108, February 14-16 and February 14-17, 1966 Reports). The evidence indicates, however that

. . . the company did not appear to be too concerned over items 1 and 2 outlined above. Conversly they seemed disturbed and concerned over the thought of invaiding the territory of the Consumer Power Company.

In the past, it was believed that the company avoided service in Michigan primarily because of FPC juri'sdic-tion. Today this is not the case. In fact it is almost certain the company will interconnect with the Consumer Power Company sometime in 1969 or 1970. . . .

(DJ 108, February 14-17, 1966 Report, p. 2). 105/

=

103/ These reports represent impartial, mutually consistent, independently prepared records which were prepared immediately after the meeting -- in one case,. from notes taken at the meeting (Darling, Tr. 5194).

104/ TE's refusal to supply power at wholesale in 1966 because of a conflict with the Buckeye Agreements, which were not executed until 1968, would appear to eviden:e a conspiracy which antedates App.

246 .nd w';ich was not brought to the attention of the Department ti connection w: ;h Ohio Power Company's request pursuani to the Business Review Procedure. See Findings 9.15-9.19.

105/ The TE-Consumers Interconnection greement was signed in March 1966 (Keck DJ 576, p. 14d), so TE knew that FPC jurisdic-tion weald be ass rted in the immediate future. See also Darling at Tr. 5192-93, 112 m

I .

a 9.11 At a September 1966 meeting to discuss the renewed re- -

quest (Darling Tr. 5195-96; DJ 108, September 13-14 and

• September 12-14, 1966 Reports), 106/ TE refused again on the ground that the company did not want to violate its agreement with Consumers (Darling Tr. 5195-97; DJ 108, September 13-14 and September 12-14, 1966 Reports). 107/

9.12 Again in June 1971, SE Michigan repeated its request and emphasized that it, and not TE, would transmit power across the state line (DJ 84-86; DJ 108, June 23-25, 1971 Report). At this time, TE was clearly subject to FPC jurisdiction (Moran Tr. 9903; 3 Keck DJ 576, pp. 155-56). Although TE had promised a rapid reply, it was slow in answering (DJ 108, July 21, 1971 Report) and finally on August 10, 1971, TE again refused the request stating that it. did not want to serve in Michigan. 108/

106/ These reports also consist of impartial, mutually consistent, independently prepared records which were executed immediately after the meeting (Darling Tr. 5197 ) .

107/ Hr. Moran's lack of knowledge concerting this agreement may be credible in view of the fact that he did not attend these meetings, that he did not know who made the request (Tr. 9981, 9984) or who responded for TE (Tr. 9983-84), and tha t the TE people concerned did not report to him (Tr. 9981-62). Sce also

n. 99, supra.

ment, Although Mr. Schwalbert denied the existence of this agree-he was testifying solely from memory of a ten year old conversation with the knowledge that he and his employer were charged with violating the antitrust laws. .

i 108/ TE has claimed that a capacity limitation prevented it frorc serving SE Michigan in 1971 and that the cooperative was so informed (Moran Tr. 9984, 10,090-91). However, TE's response to l

the request does not mention a capacity limitation problem (DJ 87). Furthermore, if a capacity limitations was the problem in serving the cooperative, it was a problem which could have been remedied, but no suggestion by TE of such a possibility appears in the record.

1 113 p - ~

9.13 In March 1974, SE Michigan again repeated its request

( DJ 88 ) and, in May, it made yet another formal request for whole-sale power (DJ 89). Although TE has agreed to negotiate (Williamson DJ 581, 1,. 44-46), no agreement has been signed at this time, over two years since the latest request (Statement of Counsel Tr.

11,920). 109/

9.14 Since the most economical way to operate and develop the SE Michigan system would be to operate it as an integrated system, and not as two isolated systems, TE's refusals prevented this most advantageous method of operation (DJ 108, May 29-30, 1975 Report; Darling Tr. 5189-90) and denied the Cooperative economies of scale and diversity of de^ mand, thereby anticompetitively raising its cost of bulk power. 110/

9.15 TE and OE are parties to agreements which deny the benefits of coordinated operation and development to their competitors and 109/ Hr. Boscn's contrary statement that TE had agreed is contradicted by both counsel and Mr. Williamson (DJ 581, pp. 44-46).

110/ TE has also urged that the Department is collaterally estopped Irom litigating this issue. The Department's legal position is set forth at great length in the Response at pages 32-45, which are hereby incorporated by reference, 114

which eliminate competition. 111/ The Buckeye Agreements (NRC 188, 190), to which OE and TE are party, are part of a combination and conspiracy to restrain the sale of electric power at wholesale, as well as a misuse of dominance and monopoly power by OE and TE (Find-ings 9.16-9.19; Conclusions L-15 through L-43 ) .

9.16 The Power Delivery Agreement, to which TE is a party (NRC 188) and the Ohio Edison-Ohio Power Company Agreement (NRC 190),

both of which define the terms and conditions under which their signatories will transmit power on behalf of Buckeye, 112/ contain provisions which require that all power transmitted under the terms of the Buckeye Agreements be consumed wholly within the 111/. Applicants' apparent argument that they entered the Buckeye Agreements in detrimental reliance on a letter from the Department of Justice (App. 248.), written pursuant to the Business Review Procedure (28 C.F.R. S50.60), is without merit. First, only the entity actually requesting such a letter may rely thereon ( App.

248, Attachment, y "3"; 28 C.F.R. S 50.60). The letter was requested solely by Ohio Power Company, not OE or TE (App. 248, 284-89; Tr. 11,905). Second, even the requesting entity was on notice tha t the letter stated the Department's then-present intention not to institute criminal proceedings and records the right to take such further civil or criminal action as might be. appropriate (App.

248, p. 3 and Attachment, V "8"; 26 C.F.R. 550.60). Finally, the Business Review Procedure places the requesting entity "under an af firmative obligation to make f ull and true disclosure with respect to the business conduct for which review is requested" (App. 248, Attachment, i "4"; 28 C.F.R. S50.60). 'There is absolutely no evidence that the requesting entity informed the Depar tment of the fact thatl the Buckeye Agreements were part of an illegal com-bination and conspiracy and tha t they contained competitive restraints not required by law (Findings 9.10, 9.15-9.19). Absent such disclosure (see App. 284-89), a claim of good faith reliance is hardly credible.

112/ Buckeye Power Inc. is a generation and transmission entity wnich is owned by 27 rural electric-distribution cooperatives located in Ohio (DJ 80; NRC 188, 190). For a brief synopsis l of Buckeye and how it operates, see App. 284.

l 115

State of Ohio (NRC 188, provision 11-1; NRC 190, provision 14(iv) and definition of " Delivery Points Energy", p.1) . This territorial limitation has prevented SE Michigan from obtaining Buckeye power for the Michigan portion of its load although the Ohio portion of the load is served by Buckeye (Bosch DJ 580, pp. 30-33; DJ 86 , DJ 88; DJ 90; DJ 108, June 23-25, 1971, and Degember 12, 1973 Reports).

9.17 The Buckeye Agreements were intended to and do deny municipal systems, which compete with TE and OE, the benefits of coordinated

. operation and development. The Buckeye Agreements were entered by private utilities in order to prevent the construction of a statewide transmission gril by rural electric cooperatives which would have .

' diluted the dominance of investor-owned utilities in Ohio (Keck DJ 576, pp. 183-84; Mansfield DJ 57 2, pp .- 118-19 ; DJ 200, Attachments 5, 11-14, 15 (rejected), 16). As :early as January 1961, Ohio Power Company was concerned that, if Buckeye constructed and owned a generation and transmission system, Ohio Power would be in danger of losing its wholesale customers (DJ 200, Attachments 11-14, 16). By February 1962, Ohio Power recognized that:

we might forestall the construction of an independent G& T system by of fering to cooperate to the extent of. allowing the cooperatives to install a generating unit or units in one of our own stations and then delivering the power to the cooperatives over our own

' facilities, with either Buckeye providing the trans-mission to load centers which we do not reach or the other utilities in Ohio which now supply cooperatives agreeing also to wheel power (DJ 200, Attachment 12, p. 5) .

Ohio Power was aware that, to successfully forestall the construc-tion of an independent cooperative generation and transmission 116

aystem, it would need the cooperation of the other Ohio utilities

( DJ 200, Attachment 12, p.~5 and Attachment 14, p. 3; Keck DJ 573, pp. 163-84. Some time before August 1962, Ohio Power engaged in discussions concerning Buckeye with other Ohio utilities, including TE and OE (DJ 80; Schwalbert DJ 577, pp. 40-42; DJ 480, pp.,46-47 (rejected)), and informed them that the plan ultimately effectuated by the Buckeye Agreements would prevent the cooperatives from building a transmission network (Mansfield DJ 572, pp. 118-19; DJ 480, pp. 46-47, 49 (rejected)) and that cooperatives owning only generation were preferable to cooperatives owning generation and transmission (DJ 480, p. 49 (rejected)).

9.18 In 1968, TE and OE entered into formal agreements with

, Ohio Power which forestalled the construction of an independent cooperative generation and transmission system and which are sub-stantially identical to the scheme conceived by Ohio Power and discussed with OE and TE in 1962 (App. 284, pp. 1-6, 8; DJ 200, Attachment 12, p. 5). Even though thi's objective was realized ,

Chio-utilities -- including TE and OE -- still feared the loss of municipal wholesale customers to th'e cooperatives and inserted a provision in the Buckeye Agreements which prevented such competi-tion (Schwalbert DJ 577, pp. 44-46; DJ 491-93; Mansfield DJ 572,

p. 171). 113/ This provisidn requires.that, before a municipal wholesale customer of an investor-owned utility can obtain Buckeye l- power, it must disconnect from the investor-owned utility and l

113/ TE actively participated in draf ting this provision (DJ 77).

117

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operate as an isolated system for 90 days 114/ (NRC 188, defini-tions of Buckeye Power Requirement (p. 3); NRC 190, definition of Delivery Points Energy (p. 1)). This restrictive provision makes it impractical for municipal systems to obtain Buckeye power (Schwalbert DJ 577, p. 46; Findings 9.20-9.24). Strict adharence to the restriction has been insisted upon by both TE (DJ 81) and OE (DJ 78-79).

9.19 The highly anticompetitive impact of this' restraint is not speculative in view of the number of municipal systems which are

or have been interested in securing bulk power from Buckeye --

Bryan (Eppard Tr. 5453, 5455-5,5a; DJ 316-20 ) , 115/ Cleveland (Hart Tr. 4705-4706, 4714; nJ '177; App. 75 and 79), Newton Falls (Craig Tr. 2927, 2937, 2953; NRC 84), Norwalk, ( DJ 425-27),and Napoleon (Findings 9.20-9.24).

9.20 On three occasions, TE has refused to wheel power for Napoleon, thereby denying this competitor the benefits of 4 coordinated operation and development'. In July 1971, Mr. Lewis, 114/ Applicants errouneously assert that this restrictive provision is no broader than the prohibitions of Ohio law. Insofar as retail sales are. concerned, Applicants may be. correct. It is clear, how-ever, that the State of Ohio is without authority to regulate wholesale sales to municipal systems (Conclusion L-5) . Indeed, if Ohio law prohibited such sales, it would not have been necessary for Applicants to place this restraint. in the Buckeye Agreements.

In a decision construing a comparable state statutory pro-vision also intended to prevent uneconomic duplication of facilities, the Supreme Court of Wisconsin found the provision applicable to retail sales, but not to wholesale sales to municipal systems.

Wisconsin Power & Light Co. v. Public Service Commission, 172 N.W.

73 677-(1969). -

L-

, 115/ TE was aware of this possibility-(DJ 82), Mr. Moran's testimony to the contrary notwithstanding (Tr. 9973).

118 ee e

a consulting engineer-for Napoleon (Tr. 5606-07), was assigned the task of conducting a bulk power supply survey to determine the poet

. economical means of aceting the City's bulk power requirements (Lewis Tr. 5606-07, 5612). Af ter studying a number of alternatives, Mr. Lewis recommended that Napoleon purchase seasonal power from Buckeye (through Tri County Cooperative) (Lewis Tr. 5612-14).

The ' Buckeye power could be delivered to Napoleon either by TE wheeling the power to the existing TE-Ndpoleon interconnection (which would be designated a " Buckeye Delivery Point") or by having Napoleon build a ten mile 69 kv transmission line to an existing substation owned by Tri County Cooperative (Lewis Tr. 5614; NRC 127). In furtherance of this plan, Mr. Lewis met with TE repre- _

sentatives and was told by TE on at least three occasions that th e company would not wheel Buckeye power and would oppose efforts by Napoleon to obtain Buckeye power (NRC 127). On one of these occasions, a March 6,1972 meeting, Mr. Cloer stated that TE would not establish a delivery point to: enable the Tri County C'o operative to steal TE's customer (NRC 127, pp. 3-4) . TE was also concerned that if Napoleon constructed a ten mile line to the Tri County Cooperative, Napoleon mi,ght serve customers along that line '(Moran Tr. 10,065-66). 116/

116/ Mr. Moran of TE agreed on deposition that the company's position was accurately stated in Mr. Lewin' affidavit, NRC 127 (Moran DJ 622, pp. 42-43), but attempted to repudiate his deposi-tion testimony and tried to qualify his acceptance of the company's position stated in NRC 127 as . referring only to the establishment of the delivery point ten miles awa (Moran Tr. 9924-29); the statement in NRC 127:with which Mr. Moran agreed on deposition

( DJ 622, pp. 42-43) ref. erred onlv to the establishment of a .,_

delivery point at the. present interconnection between TE and Napolcon. There is no dispute that TE opposed the delivery point ten miles from Napoleon ( Aoran Tr. 9847-48).

119 4

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9.21 TE has denied the benefits of coordinated operation and development to Napoleon by refusing to operate in continuous synchronism with the municipal system. On at. least three occasions between September 1971 and March 1972, TE representatives stated that TE would not operate its system in continuous synchronism with the Napoleon system, if Napoleon entered into an agreement with Tri County Cooperative tt purchase Buckeye power (NRC 127).

No technical or engineering reasons for ~ these refusals were given to Napoleon's consulting engineer'(Lewis Tr. 5635-39). 117/

9.22 TE further denied the full benefits of coordinated operation and development to Napoleon by agreeing to wheel Buckeye power only on anticompetitive terms pursuant to the Buckeye Agree-ments. In conformity with the Buckeye Agreements, Napoleon was required to disconnect its system f rom ,that of TE and operate in isolation before it could. secure power from Buckeye (Dorsey Tr.

5262, 5282, 5284; NRC 128). 118/ TE indicated that it would not wheel Buckeye power unless Napoleon completed a 90-day period of 117/_ Mr. Moran could not recall two of the discussions of this matter '(Tr. 9917-18). He agreed with NRC 127 on the remaining discussion, but stated that TE wished to protect itself against Napoleon securing power f rom a " third source" (Tr. 9849, 9935).

He testified inconsistently as to whether he had mentioned this concern to Lewis (Tr. 9849, 9937, 10,091-92), but he was sure that Lewis. had not mentioned a " third source" and he had no reason to believe that one existed (Tr. 9937). He admitted TE's concern coulo have been alleviated by a simple contractual provision (Tr. 10,068). His recollection of his deposition testimony on this topic (Ir. 10,009-12) is completely false (DJ 622, pp. 50-51).

118/ TE-felt that the restrictive provisions in the Buckeye Agreements were so strong tha t they prohibited Buckeye from com-peting for or cecuring TE's customers (DJ 146). _.

120

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isolated operation (DJ 145, 148; NRC 128-129, 131). Napoleon agreed

~

to do so (Dorsey Tr. 5264; DJ 149), though such operation would result in a serious reduction in the municipal system's reliability and' leave it totally without reserves during peak loads (Dorsey Tr. 5264-66). 119/. Napoleon informed its customers of the impending

' isolated operation and. received numerous complaints (Dorsey Tr.

5266-68; DJ 302-07 ) .

9.23 The risks of isolated operation were such that Napoleon made a written request that TE waive the 90-day cutoff requirement (NRC 130, Tr. 5269), but such a waiver was refused (NRC 131, Tr.

5269). TE took the position that it would emphatically resist any

' such waiver in Napoleon's case (DJ 150). Napoleon was therefore .

very , concerned about the possible need to reconnect with TE if an emergency arose on the municipal system during the 90-day cutoff (Dorsey Tr. 5270; Moran Tr. 9861). Napoleon suggested a simple method _ of disconnecting the systems which would require only 15 minutes to reccnn,ect in case of an emergency, but TE insisted on a cumbersome method which would recuire at least four to five hours to reconnect _(Dorsey.Tr. 5273; Moran Tr. 9861, 9947; DJ 309-10). 120/

119/ The cost of securing additional reserves was prohibitive (Dorsey Tr. 5268-69).

120/ Mr. Moran's attempt to justify TE's obstructionistic position by citing " safety" considerations (Moran Tr. 9861, 9945-55) is belied

-by his irrational rejection of less cumbersome alternative methods of resolving TE's purported concern (Tr. 9946, 9948-49, 9954). His

. final reversal Hof position consisted of admitting TE could have been protected simply by Napoleon's assurance that no city employee would enter the substation -- an alttrnative never mentioned to Napolecn (Moran Tr.--9954).

121 y -- , - *v.,.

i 9.24 Although TE would incur no additional expense for facilities or maintenance by wheeling Buckeye power (Dorsey Tr. 5276-78; Lewis Tr . 5620, DJ 148 ) , the company demanded that Napoleon pay addi-tional compensation in order to maintain the same level of service (NRC 129; App. 252; Dorsey Tr. 5275-76). Failure to pay would have caused TE to reduce its service which would have decreased Napoleon's reliability (Dorsey Tr. 5275, 5278, 5290-91). This payment would

~

'ha've substantially reduced the benefits of coordinated operation to Napoleon (Dorsey Tr. 5263-64).

l 9.25 TE denied Bowling Green the benefits of coordinated i

operation and development by refusing to wheel power. At a meeting on August 27, 1975, Mr. Smart, a TE Vice President, refused a request -

to wheel power made on behalf of Bowling Green (Hillwig Tr. 2401-03). 121/ TE's refusal was based on the adverse impact wheeling would have on the company's future load growth and the financing ce nuclear units (Hillwig Tr. 2402, 2446). TE power is wseeled by the Bowling Green system without restriction or charge (Hillwig Tr.

2367-63, 2415; Moran Tr. 4887-89, 10,072). 122/

121/ Mr. Smart testified that TE was unable to calculate a " postage stamp" wheeling rate and that he had never heard of the concept before the request was made (Tr. 10,145-50). TE is party to the Buckeye Agreements (NRC 183) which provide for " postage stamp" wheeling (White Tr. 9555) and Mr. Smart had previously urged the rejection of testimony concerning such a rate (NRC 219-21). Rate aside, TE could have. agreed in principle to wheel, as it did in CAPCO (Smart'Tr. 10,102, 10,104) -- no such agreement was made.

122/ Mr. Moran's testimony that Bowling Green does receive com-pensation pursuant to an unwritten contract to which Mr. Moran was not a party (Tr. 10,048-49) was refuted by one of the alleged parties to the agreement (McKnight Tr.11,997-93) who would not have had

" - authority to ' enter such a contract (McKnight Tr. 11,997-98, 12,006).

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b. Foreclosure of Retail Competition 9.26 TE has had and presently has a price squeeze policy which restrains retail competition between TE and its wholesale municipal customers. TE's undisputed policy is to equalize its wholesale municipal rates and its retail industrial rates (NRC 47, 127; DJ 150; Moran DJ 583, p. 52). This policy confirms Dr. Wein's (DJ 587,

p. 96) and Mr. Kampmeier's (DJ 450, p. 35) conclusions that TE has set its wholesale and retail rates to effect a price squeeze which limits and restricts competition. 123/ Further evidence of TE's policy is the following extract from a company study of its competi-tion with municipal systems:

It is conceded that the municipalities can be a competitor as well as a customer of Toledo Edison. It is suggested that our [TE wholesale]

rates be increased to reflect a better return on our cost to serve them due to the 'f act that they -

resell energy received from Toledo Edison (DJ 166,

p. 2).

While se' eking the maximum return on wholesale sales, TE has sold power to its retail industrial customers below its cost (NRC 158, p.

TE-18; NRC 169, p. 414), 124/ which is an anticompetitive practice (Gerber Tr. 11,469-70).

123/ The record refuting TE's arguments that (1) Mr. Kampmeier HId not make a detailed study to determine the exact price rela-tionship between TE and Bowling Green rates; (2) most municipal retail rates are lower than TE retail rates; (3) Napoleon at one time was able to induce an industrial customer to change service f rom TE to Napoleon due to lower municipal rates; and (4) TE rates are regulated was fully set out in the ' Response at pages 26-28, which are hereby incorporated by reference, as are Findings 3.01-3.02, 8.26-8.23. ,

124/ TE reported that its average cost per KWII for demand and energy in 1973 delivered at secondary transmission (69 kv and 34.5 kv) was 12.8 mills and at primary voltage (345 kv or 138 kv) was 14.7 mills (NRC 158, p. TE-18), but its average revenue from its two largest industrial schedules, PV 44 and PV 45, in the same year, was 12.4d' and 10.99 mills (URC 169, p. 414). Thus, TE's revenue from industrial customers was' less than its cost.

123

~~

9.27 TE's wholesale contracts with' municipal systems restrain competition. TE views its municipal wholesale customers, not only as customers, but as competitors for retail customers (DJ 166, pp.

~

1-2). 125/ In order to eliminate this competition, TE inserted 126/

provision number 8, which allocated customers, in its contracts with each of its full requirements wholesale municipal customers 127/

(Moran DJ 583, pp. 82-83). The very existence of these provisions restrained competition (Hillwig Tr. 2372, 2375, 2417; Moran Tr.

9978, 9980, 9997-98). In 1969, TE enforced the restrictive provision in its contract with Edgerton (DJ 551), 128/ It was not until Bowling 125/ Exhibit DJ 166, a document prepared by those most familiar with TE's municipal competition (Moran Tr. 9997) and one Mr. Moran was aware of (Tr. 10,089-90), completely refutes his testimony that there is no opportunity for such competition (Tr. 9909).

126/ Mr. Moran's somewhat inconsistent testimony to the ef fect tha t Bowling Green requested this restraint (Tr. 9876, 9976) is refuted both by the direct testimony of an impartial witness (McKnight Tr. 11,995-96) and the fact that Bowling Green was the last of TE's wholesale customers to sign a contract containing such a restriction.

127/ Bowling Green (NRC 45, 111), Bradner (NRC 112), Haskins (NRC 113), Liberty Center (NRC 119), Montpelier (NRC 120),

Pemberville (NRC 123) and Woodville (NRC 125) contain such pro-visions and the presently ef fective wholesale contracts with Custar (dRC 114), Edgerton (NRC 115), Elmore (NRC 116), Genoa (NRC 117), Oak Harbor (NRC 122) and Pioneer (NRC 124) still con-tain these provisions. The fact tha t these contracts have been accepted by- the 'fPC would seem to negate TE's argument that the Commission has provided an " adequate remedy" for such restraints.

12d/ Mr. Moran erroneously testified that he would be aware of any enforcement and that none had occurred (Tr. 9998).

l 124 i

Green (Hillwig Tr. 2378-84; NRC 46-47; Moran Tr. 9880, 9885-86, 10,046) and Napoleon (DJ 311, p. 19; DJ 147; Dorsey Tr. 5279-80) strongly objected to this restraint, that it was removed from their contracts (App. 35-36, 38-42, 259-60).'

9.28 TE and Ohio Power Company have been parties to an agree-ment not to serve in the same franchise town ( DJ 547). This agreement was referred to in 1972-1973 negotiations concerning the trading of customers in the Defiance, Ohio area, which either company might have served (DJ 546-50).

c. Acquisition -

9.29 TE has a company policy of acquiring and eliminating competitors, which is effectuated by denying its competitiors the benefits of coordinated operation and development. The present TE is an amalgamation of at least 190 companies which have been acquired by mergers and acquisitions (Finding 1.10). It is an informal company policy for TE to try to acquire municipal systems (Schwalbert DJ 577, pp. 7-8; Kozak DJ 579, pp. 24-25; Cloer DJ 58 2, pp . 13-14 ; Mo r an DJ 583, pp. 54-55; DJ 166).

9.30 In a 1974 memo, TE personnel noted tha t "[s]ince other pri-vate or public utility systems can serve the municipalities, we should continue our pradtice of purchasing municipal systems.

We should concentrate on th6se systems that have generating capabilities" (DJ 166, p. 2) (emphasis'added). In another 1974 125 ,

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memo, Mr. Schwalbert, a TE Vice President who had shepherded the company's acquisition program since 1962 (DJ 133-34, 138, 141; Schwalbert DJ 577, pp. 2-6), in the course of informing a new district manager of his duties, stated " acquisition of municipals is an objective high on our list" (DJ 541, p. 1).

9.31 Since 1965, TE has acqui, red two .self-generating municipal systems, Clyde and Waterville ( We in DJ . 58 7, p . 71; !HtC 158 , p .

TE-37; DJ 137, pp. 4-5) and the distribution system of Liberty

. Center (Wein DJ 587, p. 71; DJ 137, 139, 139A). TE's role has not been that of a public benef actor which had no interest in acquiring its competitiors 'unt'il invited to do so. 129/ The .

company has organized a " citizens' committee" to promote such acquisitions (DJ 541, August 7, 1973 draft, p. 5); it prefers to organize " independent" public support for its acquisition attempts (DJ 554). TE's scheme of monopolization is further revealed by -

its denial of coordinated operation and ' development to acquire a competitor (DJ 504), since an isolated system is easier to acquire (Schwalbert DJ 577, p. 19). The company was also willing to pay premium prices for competing systems (Wein DJ 587, pp. 77, 79-80; DJ 595, pp. 30011908-10).

_ =_ ____ .

129/ TE's-representatives are instructed to . solicit such invita-tions (DJ 541), which they do (DJ 553).

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9 9.32 Since 1960, TE has had written or publicly announced proposals to purchase the municipal systems of Bryan, Clyde (acquired in 1965), Edgerton (twice), Elmore 130/, Liberty Center ( twice, acquired in 1974), Napoleon (twice), Pioneer, Stryker (acquired in 1963) and Waterville (twice, acquired in 1968) and has offered to make system surv'eys which might lead to the purchase of every other municipal system in its service area (NRC 158, pp. TE-33-34, 14; DJ 552; Wein DJ 587, p. 71). Thus, since 1960, TE has attempted to acquire each of the municipal electric systems in its service area. No generating municipal competitors remain.

9.33 TE has misused its dominance and monopoly power (Find- .

ings 5.01-5.05) to deny actual and potential competing utilities the benefits of coordinated operating and development (Findings 9.01-9.25) and to eliminata, competition in the relevant markets (Findings 9.01-9.32). This misuse is violative of and incon-sistent with the antitrust laws and constitutes an existing situation inconsistent with the antitrust laws (Conclusions L-10 through L-44).

130/ It should be noted tha t the written proposal to purchase the Elmore system (DJ 552) was not. disclosed by TE in its answer to the 20 questions of the Attorney General for Antitrust Review (NRC 158, p. TE-34)..

127 9

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5. CAPCO 10.01 Prior to the time CAPCO came into being , each of the

~

Applicants was engaged in an aggressive program to eliminate com-petition in the relevant markets. Those companies which sometimes PPC sold power at wholesale to competing municipal systems, OE, and TE, only made such sales subject to severe anticompetitive restraints (Findings 8.11, 8.13-8.19, 9.27). 131/ DL had refused

~

to interconnect with or sell bulk power at wholesale to competing municipals (Findings 7.01-7.03, 7.07-7.08), while CEI conditioned interconnection upon price fixing (' Find ing s 6.02-6.03). Each had

' expanded through the acquisition of competing systems (Findings 1.02, 1.04, 1.06, 1.08, 1.10). Each had demonstrated its intent to monopolize the individual relevant markets.- It was in this posture that Applicants came together to establish CAPCO.

10.02 CAPCO was formed and implemen,ted with the intent of denying Applicants' competitors access to coordinated operation and development. The intent of the companies which formed the CAPCO Pool was to restrict membership in that pool to investor-owned utilities (Lindseth DJ 568, pp. 26-28; Fleger Tr. 8617-20, 8650). Although the CAPCO companies 'were aware of the interest of coroeting municipal systems in pooling prior to the execution of the Memorandum of Understanding (DJ 239; DJ 279, p. 7; C 49,

p. 7; C 50, p. 4; C 51, p. 4), no municipal or cooperative systems were invited to join CAPCO (Lindseth DJ 568, pp. 26-28). This exclusion was not an oversight. Applicants' concern that the FPC might force CAPCO to admit public power systems (DJ 279, p. 7; C 50, 131/ PPC and TE have also refused to sell power at whol.esale (Findings 8.12, 9.01-s.02).

128

p. 4; C 52 p. :2; DJ 280, p. 2) caused them to meet and jointly formulate a sham explanation for the present and future exclusion of such systems from the pool (C 52). 132/ It was also sug-ges ted that CAPCO be structured in such a way as to avoid FPC jurisdiction in order to prevent the admission of municipal systems (C 55, p. 3).

10.03 Applicants adopted a pooling agreement which allows each of 'them, acting individually, to exclude its competitors from CAPCO and the benefits of coordinated operation and development which it provides.- The Memorandum of Understanding which established CAPCO (NRC 184) requires unanimity in all important CAPCO decisions (DJ 284; Arthur Tr. 8370; Schaffer Tr. 8608-09; Williams Tr. 10,358), including modifications of the CAPCO allocations of generation and transmissiQn ~

(NRC 184, pp. 4-10, Appendix A). Since the admission of a new member would require such modifications, the agreement effectively gives each of the Applicants the power to veto the admission of one of its competitors to CAPCO (DJ 186-87; Arthur Tr. 8370-77). 133/

132/ The sham explanation presented to the FPC that public power systems could obtain all the benefits of CAPCO through wholesale power purchases strains ~ the , credulity of the most sym-pathetic audience. This rationale is clearly invalid (Finding .

2.41 and Conclusion L-3). In any event, at the time this expla-  !

nation was formulated, DL, PPC and TE were refusing to sell whole- )

sale power to municipal systems and CEI was conditioning even inter-  !

connection on price fixing (Finding 10.01). Indeed, DL argues that {

for it to make such sales at tha t time would have been a criminal violation of state law. Ilotion-of Applicant Duquesne Light Company for an Order' Dismissing Specific Allegations, filed April 20, 1976, at page 17.

133/ Hr. Williams' testimony during Applicants' direct case concern-ing provisions for compulsory arbitration (Tr. 10,470-72) is in con-flict with the provisions of Exhibit NRC 184 which do not provide for arbitration. Thus,.the Memorandum of Understanding, without more, was an,cxclusionary device inconsistent with and violative of the antitr63t laws. There is no evidence of record which would tend l to'show that Applicants' exclusionary policy has been abandoned.

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10.04 The Memorandum of Understanding further denies the benefi';s of coordinated operation and development to Applicants' competitors by precluding individual Applicants from engaging in coordinated operation and development with non-CAPCO utilities without the con-sont of all of the Applicants (NRC 184, pp. 4-10, Appendix A; Schaffer Tr. 8557-5d). ,

10.05 Applicants jointly adopted an allocation formula which functioned as a device to exclude small competing systems from CAPCO.

The CAPCO capacity allocation formula was not adopted until Appli-cants had conducted a study which showed that the effect of the formula on a small system," mod'eled after MELP, would be to require that system to bear' an inordinately high reserve burden (C 46; DJ 278; Kampmeier DJ 450, p. 44). 134/ Such a reserve burden would create an econcsic disincentive to join the pool (Keck DJ 576, p.

135). -

10.06 Af ter the signing of the tiemorandum of Understanding, allo-cations were to be dets mined by application of the P/N formula (Schaffer Tr. 8597). The first allocations were made arbitrarily, however, in order to lessen the burden that direct application of

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the formula would otherwise impose (C 49, p. 10-11; DJ 279, pp.

10-11; C 30, C 44, pp. 12-13; C 48, p. 4). 135/ While providing 134/

- A system with the characteristics of MELP would have to bear a reserve burden between 55 per cent (DJ 273) and 63 per. cent (C 46),

while a group of small systems, such as WCOE, would be required to carry 233 per cent reserves (Cheesman Tr. 12,236). This should be contrasted witn the normal range of 15 per cent to 40 per cent 135/ As Applicants instalt more joint units, the P/N method as a3 plied to them will yield results approximating equal percent ot peak load (Firestone Tc. 9282-33; Williams Tr. 10,463).

130 e

for a transition period for themselves, Applicants sought to adopt a set formula to apply to municipal systems which would not permit such a transition period (C 48, p. 7).

10.07 Notwithstanding the significant reserve burden on small systems already imposed by the CAPCO allocation formula, Applicants modified the formula to further increase the burden. In 1972, and again in April 1973, DL circulated a proposal recommendi g a change in the method of representing units in CAPCO calculations (C 57; DJ 283). In support of its proposal, DL urged 'that the then-existing method would encourage the entry of new pool members and could result in favorable allocations to such new members (C 57, p. 5; DJ 283,

p. 5). 136/ Af ter Applicants had been notified of MELP's request for CAPCO membership (DJ 97-98, 181, 183), CAPCO adopted a modified

• form of LL's proposal which eliminated the pot'ential benefits to new members of the prior method of calculation (DJ 372; Masters DJ 567, pp.126-30; Schaf fer Tr. 8592, 8609-11). Again, Applicants allowed themselves a transition period so tha t the change in method would not have an adverse impact on th'em (Schaffer Tr. 861?). 137/

136/ As an example of a situation unacceptable to CAPCO, the pro-posal points to the effect of the existing method on a distribution only system, with 100 mw of load, which requested a share of the next base load unit af ter Beaver Valley Unit 2 (C 57, p. 5; DJ 283,

p. 5). This example could easily encompass the request of a group of municipal systems, such as WCOE.

137/ .The method fs r. determining reserves set forth in Applicants' proposed relief ( App. 44) is equally burdensome. A previously non-generating system would be required to maintain 100 per cent reserves (Kampmeier Tr. 6142-48; Mozer Tr. 3327-28; Hughes Tr. 4095-97). A small systen with generating capacity, such as MELP, would be required to maintain 45 per cent reserves while CAPCO reserves were only 25 per cent (Mayben Tr. 7609-10).

131 4

10,08 The record shows that Applicants formulated a joint position regarding their refusal to admit Pitcairn to CAPCO membership. On December 5, 1967, Mr. McCabe', Solicitor of Pitcairn (McCabe Tr.1551), wrote to each of the Applicants asking to open discussions aimed at including Pitcairn in CAPCO (Tr. 1555, 1557-58; NRC 1-5). 138/ Following a December 11, 1967 meeting of the CAPCO Drafting Committee at which Pitcairn's request was discussed (DJ

~

130-31), 139/ both TE and CEI draf ted and circulated responses (DJ 237). DL also prepared draft responses sometime around December 14, 1967 (a7 202, 204-05). A copy of one of DL's draf ts was found in TE's files (NRC 53-54) with.a cover memo 140/ from Mr. Henry

-(who attended the December 11 meeting (DJ 130)) to TE's President, which stated: .

This [the DL draft. lette'r] goes into detail contrary to' consensus at last meeting. It is to be discussed at -

Thursday meeting. . . . (NRC 53) 10.09 On December 18, 1967, CEI sent a letter refusing Pitcairn's request for membership (NRC 10; EcCabe Tr. 1573-75) 141/

138/ Mr. McCabe did not send any of the CAPCO companies copies of his letters to other CAPCO companies (McCabe Tr.1723), but copies were circulated among them (NRC 3; Tr. *5223; DJ 224; Tr. 5111).

139/ An OE-PPC acknowledgement of NRC 3 was mailed to Pitcairn (WRC 8, McCabe Tr. 1571) and copies were found in the files of CEI (stipulation Tr. 5:23) and DL ( nJ 225 and Tr. 5144),

140/ Applicants have conceded that NRC 53 and NRC 54 are one document (Tr. 2579, L. 8-11; Tr. 2580, L. 16-25). See generally Tr. 2578-30.

141/ CEI forwarded copies of its letter to the other Applicants-( DJ 213), although the letter to Pitcairn did. not- show any copies. . c (NitC 10).

132

and the next day TE sent its refusal (NRC 7, McCabe Tr. 1566-67);

- the two responses were almost identical. 142/ On January 2, 1968,

- after a complaint by Mr. .cCabe (NRC 57), DL refused Pitcairn's request (Pleger Tr. 8624; DJ 167, p. 9) with a letter that was con-siderably shorter than' DL's initial draf ts and very similar in con-tent' to the TE and CEI responses (NRC 6; McCabe Tr. 1563-65). 143/

On January 2, OE and PPC also refused Pitcairn's request for pool membership (NRC 9; White Tr. 9508; McCabe Tr. 1572). 144/

10.10 Despite these refusals, Pitcairn again wrote to CEI and TE on January 2, 1968 (DJ 110, 125) and to OE and DL on January 11, 1968 (App. 52; White Tr. 9508; NRC 11; McCabe Tr. 1500-81) asking .

142/ TE also sent blind copies to all other Applicants (DJ 124),

143/ Copies of DL's response were distributed to the other Appli-cants on January 3, 1968 (DJ 207, 209).

144/ OE sent copies to all other Applicants (DJ 115), although Mr. McCabe's copy did not indicate this fact (NRC 9). Mr. White testifed that when OE responded to Pitcairn's request, OE was not aware of the responses of the other Applicants (White Tr. 9817).

In fact, CEI ( DJ 218) and TE (DJ 124) supplied Mr. White with copies of their responses prior to the time OE responded.

4 133 a

L

that'th6y further consider its request f.or pool membership. 145/

On January 17, 1968 the CAPCO Draf ting Committee scheduled a meet-ing to discuss the second round of Pitcairn letters (DJ 288; White Tr. 9509-10)'.

10.11 On January 22,19r8, DL responded ' stating that it was not aware of any reason to modify its earlier ref.usal, but if Mr. McCabe wishe'd to discuss the matter he should contact one of DL's attorneys (NRC 12; McCabe Tr. 1582-83). A notation on DL's fild copies (but not on the copy sent to Mr. McCabe) stated:

"This reply represents the consensus of the attorneys for the CAPCO companies" ( DJ 2,11-12, NRC 12). 146/

Shortly thereafter, TE (App. 57), CEI (App. 60) and OE (App. 53) made nearly identical responses to that of DL. 147/

145/ Though no copies were sent to the other Applicants by Mr.

McCabe (McCabe Tr. 1723), his letter to CEI was found in the files of TE (Tr. 4652-53) and DL (DJ 219; Tr. 5111) and was dictated to DL by Mr. Greenslade ot CEI ( DJ 220). In addition, Pitcairn's

, letter to TE was mailed to DL shortly af ter receipt (DJ 233) and OE sent blind copies of its letter to all other Applicants (DJ 227) .

146/ Copies were sent to the other Applicants (DJ 211).

147/ The copies of these letters placed in evidence by Applicants (App. 57, 60 and 53) do not indicate that copies were circulated within CAPCO, but other documents show that the TE (DJ 126), CEI (DJ 290) and OS (DJ 117) responses were circulated. See n. 145.

supra, with regaro to Mr. White's lack of knowledge of the rer's ot other Applciants prior to OE's reply.

134

10.12 After the " consensus" reply, Pitcairn informed DL of its desire to meet to discuss CAPCO membership (DJ 213-14) and wrote to all the ' Applicants requesting a copy of the CAPCO agreement (DJ 127, 215, 222, 229). 148/ Eaca of the Applicants, in very similar letters, declined to supply a copy of the agreement (DJ 112, 128, 217, 230). 149/

10.13 Pitcairn' continued to press for CAPCO membership and dedid'ed to meet initially with DL (McCabe Tr. 1725). At a February 21, 1968 meeting with DL, Mr. McCabe made an oral request for membership in CAPCO and again asked for a copy of the CAPCO agreement; both requests we,a refused (McCabe Tr. 1630-36; NRC -

17); Mr. McCabe wrote DL, .nemorializing the reasons DL had given for the most recent refusal to allow Pitcairn in CAPCO (McCabe Tr.

1633; DJ 121). 150/ DL prepared a draf t response (DJ 122), which has found in TE's files (Tr. 4652-53), and then sent a revised reply (App. 5). Since DL was adamant in refusing to allow Pitcairn to

______=

148/ The CEI (DJ 222) and OE (DJ 229) . letters were found in the fIIes of DL (Tr. 5111).

149/ Blind copies of these replies were circulated among Applicants.

Oh, CEI and TE sent olind copies to all applicants (White Tr. 9664),

while the DL response was found in TE's files (DJ 120; Tr. 4652-53).

150/ A copy of this was found in the files of TE (DJ 121; Tr.

-4652-53).

135 1

i a

become a member of CAPCO, the municipal system saw no use in con-tinuing its quest for membership (McCabe Tr. 1725).

10.14 The consensual nature of Applicants' refusal of Pitcairn'a request for CAPCO membership is further demonstrated by the f act that both CEI (Rudolph DJ 558, pp. 139, 218-19;kesseDJ 559, p. 154) and TE (Keck DJ 576, p. 225) wholly deferred to DL's rejection of Pitcairn's request, rather than taking any independent action.

10,15 Applicants' attempted business justifications for denying Pitcairn CAPCO membership are without substance. 151/ Insofar as these justifications are based on the size of Pitcairn's generation or a neec for the municipal system to interconnect at 345 kv, they are unsupported by the record. The regord shows that ,there are viable power pools which' include small systems (Finding 2.39), and that a small system can add to the economies and reliability of a large system (Moran Tr. 9996-97, 10,064-65). 152/ Each of the Applicants are credited by CAPCO for small generating units ranging in size from 2 's to 8 mw (Dempler Tr. 8736, 8782-83; 8856; Firestone Tr. 11,318; Bingham Tr. 10,299; Moran Tr. 10,063) --

the size of a unit has no effect on whether that unit is crediteo by CAPCO (Firestone Tr. 11,312).

-151/ Even a substantive business justification for this conduct would be without import (Conclusions L-26 and L-35).

152/ Bowl'ing' Green, for example,-wheels for TE (Finding 9.25) and Napoleon's generation has been leaseo by TE when the company had insufficient generating resources (DJ 300; Kampmeier DJ 450,

p. 44; Keck DJ 576, p. 229; Kozak DJ 57v, pp. 20-22; Dorsey Tr. 5251-52).

136

i Nor is there any engineering or contractual basis for requiring that a CAPCO member interconnect at 345.kv (Dempler Tr. 8786-88, 8793-94, 8796-97). At the time Pitciarn was refused CAPCO member-ship on this ground, neither DL nor TE had a 345 KV interconnection to any CAPCO company (Dempler 'fr. 8784-85; Moran Tr. 10,061). 153/

Mr. Dempler admitted that, so long as dn electric utility was willing to pay for its share cf the CAPCO 345 kv transmission, the lack of 345 kv transmission facilities of its own would not be an obstacle to CAPCO membership (Tr. 8788, 8796).

10.16 Applicants' response to MELP's request for CAPCO membership displays the same consensual nature found in the denial of Pitcairn's, req _uest. On April 4, 1973, MELP sent a letter to CEI requesting admission to CAPCO (DJ 181). CEI circulated this request, tog e tn'er with its response (DJ 183), to each of the Applicants (DJ 97). The request was then discussed 153/ Indeed, even a complete inability to step up generating resources to 345 kv does not appear to be an obstacle to CAPCO membersnip or participation. None of DL's wholly-owned existing or planneo generating resources will be stepped up and introduced into' the CAPCO network, but DL is and will be creoited for this generation (,Dempler Tr. 8850-51~, 8853, 8856).

137

. _ _ _ _ ~

l at the April 27, 1973 CAPCO Executive Committee meeting (DJ 98,

p. 9; White Tr. 9512).

10.17 On August 3, 1973, MELP sent each of the Applicants a detailed proposal for pool membership and' participation in nuclear units (DJ 100, 185). At an August 8, 1973 CEI meeting, which was attended by the company's ranking policy makers,

"(I] t was decidea that the company should refuse to agree to Cleve' land becoming a member of CAPCO" ( DJ ' 291, p . 3). This deci-sion was communicated outside the company on August 17, 1973 (DJ 291, p. 4). HELP repeated its. request for CAPCO membership in a September 18, 1973 letter to all Applicants (DJ 102) and in a September 25, 1973 meeting with CEI. Depsi te the fact that a

'decsion had already been made, CEI refused to give MELP a definite response to its request (DJ 291, pp. 8-14).

10.18 When MELP became adamant about receiving an answer, a special CAPCO Executive Committeo Meeting was called (DJ 103). At this meeting, held on December 7, 1973, MELP's request was again discussed (DJ 104; White Tr. 9514-16; Arthur Tr. 8349) and all of the Applicants agreed to communicate their responses to CEI prior 4

to the next HELP-CEI meeting (DJ 104). Thereafter, each of the Applicants did so (White Tr. 9515-15; C 61; Williamson DJ 581, 138 t

., p. 18; C 63; stipulation Tr. 7433). DL, in addition, mailed a copy of its response to MELP (DJ 105, 187), 154/

10.19 On December 13, 1973, MELP met with CEI. At this meet-ing, Mr. Howley handed out a copy of DL's response (DJ 186; Hart Tr. 4745-46) and announced that DL's letter reflected the fact that the CAPCO companies did not think it made sense for MELP to become a member of CAPCO (DJ 291, p. 18). 155/ This was the jointly form-ulated CAPCO response to MELP's request (Rudolph DJ 558, p. 245).

Mr. Howiey added CEI's oral and written denials of MELP's request (DJ 188; DJ 291, pp. 18-22; Hart Tr. 4795). 156/

154/ DL urges that it acted uhilaterally in responding to MELP 's request. However, DL knew that each CAPCO member had a veto power over important CAPCO decisions, such as the admission of a new member, and that it could therefore make its decision binding on the other CAPCO members (DJ 187, Authur Tr. 8370-77).

155/ The reasons given for the refusal were spurious. Although 6L claimed that there would be no advantages to DL if MELP

, joinea the pool (DJ 186-87), neither DL (Arthur.Tr. 8349) nor OE (White Tr. 9808) conducted a study to determine the ef fect upon them of MELP's admission to CAPCO. M r '. Slemmer, Applicants' expert on pooling, testified that he could not imagine Applicants turning down a request for membership without first studying the matter (Tr. 9122, 9152). See Finding 2.38.

The other reason for refusing the request, that MELP's generation, transmission and distribution were dissimilar to that of the CAPCO companies, was totally discredited on cross examination (Arthur Tr. 8378-85). In fa c t , Mr. Arthur admitted that he had no basis for making some of the statements he had made in DJ 166 and Id7 (Arthur Tr. 6384).

156/- DL informed $ELP that, because the municipal system was located next to CEI, its needs could be more appropriately dealt with by CEI (Arthur Tr. 8361). DL itself engages in transactions with nonaajacent utilties (Arthur Tr. 8363-69).

139 9

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i 10.20 Applicants have agreed, combined and consJ ired to collectively boycott their municipal competitors, to monopolize the relevant markets and to eA.ninate competition by denying competing municipal systems the benefits of coordinated operation and development (Findings 10.01-10.19). Re f usals by . individual Applicants to engage in coordinated operation and development and other individual anticompetitive conduct in effectuation of this general agreement and conspiracy are attributable to all of the Applicants (Conclusion L-23) .

10.21 Applicants individual and collective misuse (Findings 6.01-10.20) of their dominance and monopoly power (Findings .

5.01-5.05) is violative of and inconsistent with the antitrust laws and constitutes an existing situation inc'onsistent with the antitrust laws (Conclusions L-10 through L-44).

III.. MAINTENANCE OF THE SITUATION L-52. In order to find that the activities under the license will create or maintain a situation inconsistent with the antitrust laws, a relationship or " nexus" must be shown to exist between tne activities under the license and the situation inconsistent.

The requisite nexus is present when those activities either 140 I i l

create a new situation or maintain a preexisting situation.

Kansas Gas and Electric Company and Kansas City Power and Light Com2any (Wolf Creek Generating Station, Unit No. 1), ALAB-279, 1 N.R.C.I. 559, 568-69 (1975).

11.01 The Department has shown that a situation inconsistent with the antitrust laws exists. This situation consists of Appli-cants' elimination of competition through the misuse of their dominance and market power in the relevant markets (Findings 5.01-10.21; Conclusions L-10 through L-44).

11.02 The " activities und.er the license" include the integra-tion of approximately 5100 mw of nuclear power into Applicant's respective systems for marketing in Ohio and Pennsylvania (DJ

'495). To market thi s Tuclear power , it must be used in conjunction with other forms of generation (Williamson DJ 581, p. 38; Masters DJ 567, pp. 55-56, 59; Kampmeier DJ 450, pp. 51-52; DJ 557; Mozer NRC 205, pp. 62-64, 70-80; Hughes NRC 207, pp. 30-32). If the units which are the subject of th'is proceeding were operated physically and contractually isolated f rom an Applicant's systems, or from the CAPCO Pool, at most only 50. per cent of the power available f rom those units could be marketed as firm power, the remaining ' power of necessity being held in reserve under the

" single largest unit down" standard (Kampmeier DJ 450, pp. 19-21; Finding 2.09). The feasibility of these large-scale nuclear 141

- - - +

units depends on the availability of other generation for reserves (M,ozer NRC 205, p. 12, Tr. 3,350-52). Other forms of coordinated operation and development, such as main.tenance power and emergency power, must also be available if Applicants are to be able to practically construct and market power from these large nucJ ear units (Keck DJ 576, p. 32; Masters DJ 5,6.7 , p p . 32, 57-58; Sullivan DJ 578, p. 27; Hughes NRC 207, pp. 30-32; Mozer NRC 205, pp. 8-9, 11-12, Tr. 3,350-52; Firestone Tr. 9228).

11.03 In order to engage in reserve sharing and other necessary forms of coordinated' operation and development, Applicants' nuclear plants must be connected to their other generation facil- -

ities through an extra high voltage transmission network (Masters DJ 567, pp. 36, 59; NRC 157, p. DL-7; Kampmeier DJ 450, p. 52; Mozer NRC 205, pp. 9, 13-14, 17-18, 25-26, 60, 63-66, Exhibit HMM-1).

Construction of extra high voltage transmission is usually part of a generation expansion plan (Caruso Tr. 10,916-17) and Applicants have constructed transmission lines associated with the installation of Beaver Valley 2, Perry 1 and 2 and Davis Besse 1, 2 and 3 (Mozer NRC 205, pp. 9, 13-14, 17-18). "The CAPCO transmission agreement recognizes the need for a CAPCO system of bulk transmission lines to enable the parties to transfer power from jointly owned units to the systems of the owning parties" (Firestone App. 122, p. 11).

142 b

11.04 The economic feasibility of the subject nuclear plants also depends on the Applicants' ability to transmit power f rom a single nuclear unit to multiple load areas for the purpose of load growth pooling (Mozer NRC 205, pp. 10-11, 13-14, 17-18, 25-27; Masters DJ 567, pp. 36, 59).

11.05 The marketing of power from the subject nuclear plants will enable Applicants to lower their average cost of power. It is undisputed that the power available from the subject nuclear units is expected to be the cheapest base load power 'available to serve new and growing loads (Kampmeier DJ 450, p. 52; Williamson DJ 581, pp. 36-38; Sullivan DJ 578, pp. 210-11; Kekela DJ 574 p. 123; Masters DJ 567, pp. 5'5-56; DJ 285, pp. 10-14; DJ 92-94, 98; Dempler Tr. 8873; Smart Tr. l'0,129; Mozer NRC 205, p. 61; Hughes NRC 207,

• pp. 30-32; C38; C152, 153). 157/ This nuclear' generating capacity will also be environmentally cleaner as well as more reliable due to the uncertain future availability of' oil, gas 158/ and environ-mentally acceptable coal (NRC 157,'p. TE-3; DJ 98; DJ 157, DJ 511, pp.

40-41, 90-92, Keck DJ 576, pp. 123'24)'.

=_ __________

157/ In view of the current requirements for effluent controls on lossile plants, the supposed high capital cost of nuclear plants is not significantly greater than tnat lof coal plants, and the overall cost is lower (DJ 511, p. 92) .

158/ Congress has ennunciated changes in national fuel policy in-tendeo to turn electric utilities away f rom the use of natural gas or oil for generation of electric power. Public Law 93-319 (June 22, 1974). 15 U.S.C. S792 gave the Federal Energy Administration the power to prohibit any power plant 'or major fuel burning installation from burning natural gas or petroleum products as its. primary energy source. .

143 9

-0

e 11.06 dithout the benefits of coordinated operation and develop-ment, the municipal systems located within Applicant " service areas

, wi'11 be unable to construct or utilize nuclear generation (Finding 2.27). Because of their pronounced economies of scale, nuclear plants are seldom, if ever, built in small sizes (Finding 2.12). A small utility cannot construct the required major transmission facilities (Mozer NRC 205, p. 9; Findings 2.29-2.3'l; Conclusions L-1 and L-2; See also.n.36, supra). Only a large system or a group of intercon-nected and coordinated systems can practically use nuclear power (Kampmeier DJ 450, p. 25; Finding 2.27).

11.07 To the extent that Applicants are able to reduce their average cost of power while preventing their a,ctual and potential competitors from doing so, they enhance and maintain their dominance and monopoly power to the detriment of their competitors (Kampmeier DJ 450, p. 52; Hughes NRC 207, pp. 30-32).

11.08 The unrestricted marketing of power f rom the subject nuclear units will, therefore, maintain the existing situation inconsistent with the antitrust laws (Pindings 11.01-11.07).

V. RELIEF L-53. Once monopolization has occurred', the suspension of some of the exclusionary practices used to monopolize does not necessarily constitute a neutralization or elimination of eithe': the monopoliza-

_ tion or monopoly power which has been misacq1 ired or abused. "The 144

• l l

. . l

F reliet in an antitrust case must be 'ef fective to redress the viola-tions' and ' to restore competition. '" Ford Motor Co. v. United S_tates, 405 U.S. 562, 573 (1972), quoting United _ States v. E.I. duPont de jemours_& Co., 366 U.S. 316, 326 (1961).

t The Court is not limited to imposing relief which will merely restore the status quo ante.

Ford Motor Co. v. United States, 4'05 U.S. at 573, n. 8. Rather, the relief snould be directed to eliminating the ef fecta of the illegal activities. Ford Motor Co. v. United States, 405 U.S. at 573, n. 8; United States v. E.I. duPont de Nemours & Co., 353 U.S. 586, 607-608 (1957); United States v. United States.Gvpsum Co., 340 U.S. 76, 88 (1970), and should act to " pry open to co.: petition a market that has been closed by defendants' illegal restraints." Ford Motor Co. v.

United States, 405 U.S. at 577-78, quoting International Salt Co.

v. United States, 322 U.S. 392, 401 (1947). In United States v.

Grinnell_ Corp., 384 U.S. 563, 577 (1966), the Court held: "We start from the premise that adequate relief in a monopolization case should put an end to the combination and deprive the defendants of any of the benefits of the illegal conduct, and break up or render impotent the monopoly power found to be in violation of the act."

L-54. The fact that a monopolist has discontinued an anticom-petitive or exclusionary practice does not obviate the need to remedy the monopolization. Diener's, Inc. v. Peo_ral Trade Commission, 145 e e

494 P. 2d 1132 (D.C. Cir. 1974); Doherty, Clifford, Steers & Shen-

^

field,'Inc. v. Federal Trade Commission, 392 F.2d 921 (6th Cir.

196J); Libbey-Owens-Ford Glass Co. v. Federal Trade Commission, -

352 f.2d 415 (6th Cir. 1965); Giant Food. Inc. v. Federal Trade Commission, 322 F.2d 977 (D.C. Cir. 1963), cert. denied, 376 U;S. 967 (1964); Clinton Watch Co. v. Federal Trade Commission, 291 F.2d 838 (7th Cir. 1961), cert. denied, 368 U.S. 952 (1962);

Dolcin Corp. v. Federal Trade Commission, 219 F.2d 742 (D.C.

Cir. 1954), cert. d'enied. 348 U.S. 981 (1955); Standard Distri-butors, Inc. v. Federal Trade Commission, 211 F.2d 7 (2d Cir.

1954); Dejog_ Stores. Inc. v. Federal _ Trade Commission, 200 P.2d 865 (2d Cir. 1952); C. Iloward !!unt Pen;Co. v. Federal Trade Commission, 197 F.2d 273' (3d Cir. 1952).

L-55'. Without binding relief, thqre is no assurance that the anticompetitive practice will not recur in the future.

Clinton Watch Co. v. Federal Trade Commission, 291 F.2d 838 .

(7th Cir. 1961); Giant Food, Inc. v. Federal _ Trade Commission, 322 P.2d 977 (D.C. Cir. 1963). The Court held in Federal Trade Commission v. National Lead Co., 352 U.S. 419, 430 (1957) that in some. instances "the Court is obliged not only to suppress the unlawful practice but to take such

• reasonable action as is calculated to preclude the revival of the illegal practices".

12.01 In order to remedy the continuing ef fects of Applicants' anticompetitive conduct, license conditions must be fashioned which will not only eliminate Applicants' present anticompetitive behavior, but whien will " pry open ,

to competition a market which has been closed by defendants 146

e. >

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illeg'al restraints." Applicants must also be prevented from future misuse of their dominance and market power (flughes Tr.

4073).

12.02 To remain viable and become competitive the small systems located within the CCCT must have access to the benefits of coordinated operation and development which are available to Applicants (Findings 2.33 and 2.40). These small systems can obtain the full range of power supply options necessary for an economic and reliable bulk power supply only through arrange-ments with the Applicants (Mozer NRC 205, pp. 70-71, Exhibit HMM-10).

12.03 In order to remedy the ef fects of Applicants' past and present anticompetitive practices and to avoid maintenance -

of a situation inconsistent with the an'titrust laws, each Applicant should be required, as a condition of the licenses sought herein.

to: (1) grr.nt equal participation (ownership or unit power purchase) in the subject nuclear units, in the Beaver Valley Power Station, No. 2, and in all future nuclear and fossil fuel units installed by the Applicants during the term of the instant licenses; (2) offer to sell full requirements and partial require-ments bulk power at wholesale for resaie to any entity engaging or proposing .to engage in the sale of electric power at wholesale or at retail and provide upon request the rate which the company will charge for such service; (3) impose no limitation on the use of purchased bulk power except. as is necessary to protect

, its system; (4) permit cancellation of any full or partial requirenents bulk power wnolesale contract upon a notice period 147 e

L

of not more than two years; 159/ (5) impose no capacity restriction on any full or partial requirements wholesa.le customer; 160/

(6) interconnect and share reserves with any electric utility in its area' engaging or proposing to engage in the generation and transmission of electric power, on fair reserve-sharing principles equivalent essentially to those required by the Federal Power Commission in the Gainesville 161/ decision; .(7) engage in coordinated development with a'ny electric utility or group of electric utilities engaging in or proposing to engage in bulk power supply with which Applicants are or may feasibly be inter-connected, by incorporating the load requirements of such utility or utilities into the collective load requirements of Applicants and cooperating in planning and construction of large base-load units to satisfy pooled load gro' wth requirements, and to provide, for reasonable charges, the transmission services associated with .

159/ An Applicant may protect its investment in those facilities used solely to serve a single wholesale customer by including a contract provision which provides (1) tha t , upon cancellation of the contract, the wholesale customer shall pay the Company for any otherwise unuseable facilities which the Company used solely to serve that customer; and (2) that the " amount to be repaid be reduced annually by a stated percentage which allows for depreciation and recapture of capital so that af ter a reasonable term, the wholesale customer may cancel the contract without paying a p'enalty.

160/ An Applicant may protect its system against sudden increase In~ demand by a wholesale customer by requiring notice of not more than one year of a projected load related to service to any customer not previously served by either the wholesale customer or the Applicant.

161/ See Gainesville Utilities Department v. Florida Power Corp.,

IU2 U.S.'5II If97f). ~

148

~

such coordinated development; (8) provide at a reasonable cost present and future third party wheeling services to, f rom and be-tween entities located within and without the CCCT to which Appli-cant now or in the future is interconnected and upon reasonable notice include in its planning and construction programs such in-creases in its transmission capacity as may be required for such transactions; (9) provide on reasonable terms and conditions other coordinating arrangements, such as emergency power,' maintenance power, economy energy and transmission services from generation owned by the Applicants; (10) submit to compulsory binding arbitra-tion on any disputes that may arise as to the technical or engineer-ing feasibility or requi'rements in the implementation of the pro-visions of (1) through (9) above; (11).. advise each. major neighbor-ing utility and each smaller utility in the relevant area that it will not directly or indirectly enter into, maintain, or enforce any contract, agreement, or understanding with any other electric utility system to limit, allocate, restrict, divide or assign the markets or territories in which any other electric utility may hereaf ter sell or supply firm power in bulk power exchange services; and (12)

Applicants shall collectively make available to all entities within the CCCT .the full . benefits of coordinated operation and develop-ment which 'may be secured through membership in the CAPCO Pool, including but not limited to, all of the benefits which each company is ordered to severally provide, and shall submit 'o binding arbitration on any disputes that may arise in the implementation of this provision. .

l 149

C_0_NCLUSION The Department of Justice urges the Atomic Safety and Licensing Board to adopt the foregoing findings of fact and conclusions of law.

Respect [ullysubmitted,

, STEVEN N. CHARNO

./

ME IN G. BbhGER e

e gem bm

. JANET R. URSAN f'

Attorneys -

4-4

t. . _

I UNITED STATES OF AMERICA NUCLEAR REGULATORY CO!! MISSION BEFORE THE ATO!!IC SAFETY AND LICENSING BOARD .

4 In the Hatter of )

)

The Toledo Edison Company and )

The Cleveland Electric Illuminating ) Docket Nos. 50-346A Company ) '50-500A (Davis-Besse Nuclear Power Station,- ) 50-501 A Units 1, 2 and 3) )

. )

The Cleveland Electric Illuminating ) Docket Nos. 50-440A Company, et al. ) 50-441A (Perry Nuclear Power Plant, . , ) -

Units 1 ano 2) ) l CERTIFICATE OF SERVICE I hereby certify that copies of FINDINGS OF FACT AND *

~

CONCLUSIONS OF LAW OF THE UNITED STATES DEPARTMENT OF JUSTICE have been served upon all of the parties listed on the attach- {

ment hereto by deposit in the United States mail, first class, airmail or by hand this 8th day of September 1976.

I

. .)

-~

1..

STEVEN M. CHARNO 1 Attorney, Antitrust Division ]

Department of Justice V _ _ .

I ATTACHMENT Douglas V. Rigler, Esq. Gerald Charnoff, Esq.

Chairman, Atomic Safety and Wm. Bradford Reynolds, Esq.

Licensing Board Robert E. Zahler, Esq.

, Foley, Lardner, Hollabaugh Jay H. Bernstein, Esq.

and Jacobs Shaw, Pittman, Potts &

815 Connecticut Avenue, N.W. Trowbridge Washington, D.C. 20006 1800 M Street, N.W. i Washington, D.C. 20036 Ivan W. Smith, Esq.

Atomic Safety and Licensing

• Frank'R. Clokey, Esq.

Board Special Assistant, Attorney Nuclear Regulatory Commission General ,

Washington, D.C. 20555 Room 219 Towne House Apartments John M. Frysiak, Esquire Harrisburg, Pennsylvania 17105 Atomic Safety and Licensing Board Donald H. Hauser, Esq.

Nuclear Regulatory Commission Victor A. Greenslade, Jr., Esq.

Washington, D.C. 20555

• The Cleveland Electric Illuminating Company Atomic Safety and Licensing 55 Public Square Board Panel Cleveland, Ohio 44101 Nuclear Regulatory Commission .

Washington, D.C. 20555 Leslie Henry, Esq.

Michael M. Briley, Esq.

Docketing and Service Section Roger P. Klee, Esq.

Office of the Secretary Paul M. Smart, Esq. .

Nuclear Regulatory Commission Fuller, Henry, Hodge & Snyder Washington, D.C. 20555 Post Office Box 2088 Toledo, Ohio 43604 Reuben Goldberg, Esq.

David C. Hjelmfelt, Esq. Russell J. Spetrino, Esq.

Goldberg, Fieldman & Thomas A. Kayuha, Esq.

Hjelmfelt Ohio Edison Company 1700 Pennsylvania Avenue, N.W. 47 North Main Street Suite 550 Akron, Ohio 44308 Washington, D.C. 20006 Steven B. Peri Tocence H. Benbow,Esbsq.

James B. Davis, Director of A. Edward Grashof, Esq.

. Law Steven A. Berger, Esq.

Robert D. Hart, 1st Assistant Winthrop, Stimson, Putnam Director of Law & Roberts City.of Cleveland 40 Wall Street 213 City _ Hall New York, New York 10005 Cleveland,. Ohio 44114 Thomas J. Munsch, Esq.

General Attorney .

Duquesne Light Company 435 Sixth Avenue Pittsburgh, Pennsylvania 15219 L

David, Olds, Esq. Joseph Rutberg, Esquire William S. Lorach, Esq. Office of the Executive Reed, Smith, Shaa & McClay Legal Director Union Trust Building Nuclear Regulatory Commission Box 2009 Washington, D.C. 20555 Pittsburgh, Pennsylvania 15230 William J. Kerner, Esquire

. Lee A. Rau, Esq. Office of the General Attorney Joseph A. Rieser, Jr., Esq. The Cleveland Electric Reed, Smith, Shaw & McClay Illuminating Company suite 900 Post Office Box 5000 1150 Connecticut Avenue Cleveland, Ohio 44101 Washington, D.C. 20036 ,

Alan P. Buchmann, Esquire Edward A. Matto, Esq. Squire, Sanders & Dempsey Richard M. Firestone, Esq. 1800 Union Commerce Building Karen H. Adkins, Esq. Cleveland, Ohio 44115 Antitrust Section 30 E. Broad Street 15th Floor Columbus, Ohio 43215 Christopher R. Schraff, Esq.

Assistant Attorney General Environmental Law Section 361 E. Broad Street ,

8th Floor '

Columbus, Ohio 43215 James R. Edgerly, Esq.

Secretary and General Counsel

• Pennsylvania Power Company One East Washington Street New Castle, Pennsylvania 16103 John Lansdale, Esq.

Cox, Langford &~ Brown 21 Dupont Circle, N.W.

Washington, D.C. 20036 Michael.R. Gallagher, Esq.

Gallagher, Sharp, Fulton, Norman'& Mollison G30 Bulkley Building Cleveland, Ohio 44115 Jack R. Goldberg, Esq.

Benjamin H. Vogler, Esq.

Roy P. Lessy, Jr., Esq.

Office of the General Counsel .

Nuclear. Regulatory Commission' '

Washington, D.C. 20555

.