ML19329D128
| ML19329D128 | |
| Person / Time | |
|---|---|
| Site: | Davis Besse, Perry, Midland |
| Issue date: | 03/13/1978 |
| From: | Reynolds W, Zahler R CLEVELAND ELECTRIC ILLUMINATING CO., SHAW, PITTMAN, POTTS & TROWBRIDGE, TOLEDO EDISON CO. |
| To: | |
| References | |
| NUDOCS 8002250836 | |
| Download: ML19329D128 (52) | |
Text
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UNITED STATES OF AMERICA NUCLEAR REGULATORY COMMISSION Before the Atomic Safety anc Licensing Appeal Boart 3/s/rf In the Matter of
)
)
THE TOLEDO EDISON COMPANY and
)
THE CLEVELAND ELECTRIC ILLUMINATING
)
Docket No. 50-346A COMPANY
)
~
(Davis-Besse Nuclear Power Station,
)
Unit 1)
)
)
THE CLEVELAND ELECTRIC ILLUMINATING
)
)
Docket Nos. 50-440A (Perry Nuclear Power Plant,
)
50-441A Units 1 and 2)
)
)
THE TOLEDO EDISON COMPANY, ET AL.
)
(Davis-Besse Nuclear Power Station,
)
Docket Nos. 50-500A Units 2 and 3)
)
50-501A APPLICANTS' SUPPLEMENTAL BRIEF Of Counsel:
ALAN P.
BUCHMANN WM. BRADFORD REYNOLDS SQUIRE, SANDERS & DEMPSEY ROBERT E.
ZAHLER DONALD H.
HAUSER SHAW, PITTMAN POTTS &
VICTOR F. GREENSLADE, JR.
TROWBRIDGE 1800 M Street, N. W.
The Cleveland Electric Washington, D. C.
20036 Illuminating Company Counsel for Applicants MICHAEL M.
BRILEY PAUL M.
SMART FULLER, HENRY, HODGE & SNYDER The Toledo Edison Company DAVID McN. OLDS JOSEPH A. RIESER, JR.
REED SMITH SHAW & McCLAY Duquesne Light Company TERRENCE H. BENBOW STEVEN A.
BERGER STEVEN 3. PERI WINTHROP, STIMSON, PUTNAM
& ROBERTS Ohio Edison Company and Pennsylvania Power Company
TABLE OF CONTENTS
? ace A.
fi!GNIFICANT MARKET STRUCTUP.E DIFFERENCES SETWEEN IHE MICHIGAN LOWER PENINSULA AhO NORTHERN OHIO-WESTERN PENNSYLVANIA.
4 3.
ANOTHER LOOK AT RELEVANT MARKETS AND MONOPOLY POWER PRINCIPLES IN THE NORTHERN OHIO-WESTERN PENNSYLVANIA AREA IN LIGHT OF ALA3-452 20 1.
The coordination services marke:
20 2.
The retail market 22 3.
The wholesale market 24 C.
APPLICATION OF THE ALAB-452 REASONABLENESS PRINCIPLES TO THE CONDUCT OF THE APPLICANT COMPANIES 34 1.
Nuclear access 36 2.
Pool participation.
38 3.
Reserve sharing 38 4.
Coordination.
39 5.
Wheeling 42 D.
APPLICATION OF THE ALA3-452 RELIEF PRINCIPLES TO THIS PROCEEDING 45 Appendix A Appendix 3
LEGAL CITATIONS
? age CASES:
Alabama Power Co. (Joseph M. Farley Nuclear Power Plant, Units 1 and 2), LSP-77-24, 5 N.R.C. 804 (1977) 23 Consumers Power Co. (Midland Plant, Units 1 and 2), ALAS-452, 6 N.R.C.
(Dec. 30, 1977) passim Credit Bureau Recorts, Inc. v.
Retail Credit Co.,
358 F.
Supp. 780 (S.D. Tex. 1971) 16 General Communications Engineering Inc. v.
Motorola Communications & Electroncis, Inc.,
421 F.
Supp. 274 (N. D. Cal. 1976) 14 Greenville Publishine Co. v. Daily Reflector Inc.,
496 F.2d 391 (4th Cir. 1974) 18 Hanover Shoe, Inc. v. United Shoe Machinery Corp.,
392 U.S. 481 (1968) 18 International Rvs. of Central America v. United Brands Co.,
532 F.2d 231 (2d Cir.), cert.
denied, 97 S.Ct. 101 (1976) 19 Ovitron Core. v. General Motors Corp., 295 F.
Supp.
373 (S.D.N.Y. 1969) 18, 36 Philadelchia World Hockev Club, Inc.
v.
Philadelchia Hoc. key Club, Inc., 351 F.
Supp. 462 (E.D. Pa.
1972) 18 I
Schine Chain Theatres, Inc. v. United States, 334 U.S.
110 (1948) 23 Union Leader Corp. v. Newspapers of New England, 284 F.2d 582 (1st Cir. 1960) 36 United States v. Citizens & Southern National Bank, 422 U.S. 86 (1975) 33 United States v.
Falstaff Brewing Corp., 410 U.S.
526 (1973) 11 ii n
Page United States v. First National Bank &
Trust Co. of Lexincton, 376 U.S.
665 (1964) 16 United States v. General Dynamics Corp.,
415 U.S. 486 (1974) 33 United States v. Griffith, 334 U.S.
100 (1948) 23 United States v.
Harte - Hanks Newspapers, Inc., 170 F.
Supp 227 LN.D. Tex. 1959) 18 United States v. Jerrold Elect.roncis Corp.,
187 F.
Supp. 545 LE.D. Pa. 1960), aff'd, 365 U.S. 567 (1961) 14 United States v. Marine Bancorporation, 418 U.S. 602 (1974) 32 United States v. Phillies Petroleum Co.,
367 F.
Supp. 1226 (C.D. Cal. 1973) 11 United States v. Western Union Telecraph Co.,
53 F.
Supp. 377 (S.D.N.Y.
1943) 18 United States Steel Corp. v. Fortner Enterprises, Inc., 97 S.Ct.
861 (1977) 14 STATUTES:
Pennsylvania Statutes:
Act. No 216 (July 20, 1968) 32 15 P.S. S ll22 (e) 32 15 P.S. S 1322 E 32 MISCELLANEOUS:
A. Neale, The Antitrust Laws of the United States of America (2d ed. 1970) 35 Shenefield, Antitrust Poliev within the Electric Utility Industry, 16 Antitrust Bull. 681 (1971) 18 iii
UNITED STATES OF AMERICA NUCLEAR REGULATORY COMMISSION Before the Atomic Safety and Licensine Apceal Board In the Matter of
)
)
THE TOLEDO EDISON COMPANY and
)
THE CLEVELAND ELECTRIC ILLUMINATING
)
Docket No. 50-346A COMPANY
)
(Davis-Besse Nuclear Power Station,
)
Unit 1)
)
)
THE CLEVELAND ELECTRIC ILLUMINATING
)
)
Decket Nos. 50-440A (Perry Nuclear Pcwer Plant,
)
50-441A Units 1 and 2)
)
)
THE TOLEDO EDISON COMPANY, ET AL.
)
(Davis-Sesse Nuclear Pcwer Station.
)
Docket Nos. 50-500A Units 2 and 3)
)
50-501A APPLICANTS' SUPPLEMENTAL BRIEF Pursuant to the Appeal Board's invitation in its Order of January 12, 1978, Applicants in the above-captioned proceeding submit this Supplemental Brief discussing the antitrust decision rendered by the appeal Board in Consumers Power Co. (Midland Plant, Units 1 & 2), ALAB-452, 6 N.R.C.
(December 30, 1977)
(hereinafter cited as "ALAB-452, slip cp. at * *
- "),
and the ap-plicability of that decision to the instant case.
Since it ob-viously is not possible to present a complete analysis of the Consumers opinion within the specified page limit for this filing, we have focused our attention en four general areas that seem to have particular relevance to the case at hand, namely:
market structure, monopoly power, alleged misconduct and relief.
At the outset, it should be noted that there is much in ALA3-452 that Applicants find heartening.
For example, we are
- encouraged by the detailed f actual review undertaken by the Consumers Appeal Board.
As we have previously indicated (see App. Opening Br. at 137-39; App. Reply 3r. at 76-77), there are reasons here, at least as compelling as those found in ALAS-452, for this Appeal Board to make the same sort of careful examina-tion of the full evidentiary record -- which was only super-ficially consi dered by the Licensing Board below.
Compare ALA3-452, slip op. at 270-74.
Similarly encouraging is the thorough discussion in ALA3-452 devoted to market analysis.
But for the section of the opinion dealing with retail markets, the market analysis in Consumers parallels in virtually every material respect the position taken by Applicants on this subject through-out the present proceeding.
Ccmpare ALAB-452, slip op. at 105-67, 200-12 with App. Opening Br. at 93-97 and App. Reply 3r. at 41-45; see pp. 20-33, infra.
Finally, we can also take a degree of satisf action in the f act that -- unlike the relief framed below --
Applicants' suggested approach with respect to the formulation of an appropriate remedy comports fully with the Consumers Appeal Board's abbreviated but instructive remarks in this area.
Compare ALAB-452, slip en. at 431-32 with App. Opening Br. at 293-97 and App. Reply Br. at 15-24.
i There are, however, portions of ALA3-452 which Applicants find somewhat disquieting.
One example is the exceedingly narrow perspec-l tive of the Consumers Appeal Board in its approach to the dif-ficult, but very necessary, task of reconciling antitrust policy l
and enforcement with the economic and market realities of the l
[
electric utility industry.
As a result, it is evident that the 1
Appeal Board there succumbed too timidly to the temptation to rely on broad antitrust pronouncements, judicially formulated in entirely different market settings, to avoid coming to grips with important f actual distinctions that plainly differentiate the antitrust analy-sis in this context from the earlier precedents found to be control-ling.
predictably, this doctrinaire approach led in several instances, as, for example, in the Board's discussion of monopoly power, to inaccurate conclusions because a legal rule has been misapplied in terms of the unique market setting that character-1:es the electric utility industry.
Applicants would caution this Appeal Board against such an indiscriminate use of antitrust methodology, which has largely been developed to meet competitive concerns (not realistically at play here) under markedly different circumstances.
A tidiness of theory, although perhaps superficially appealing, is never reason to sweep within the general rubric that which, on substan-tive analysis, simply does not fit the formalistic prescription.
This is not to suggest that ALAS-452 is to be totally ignored.
However, the evidentiary record compiled in this proceeding is obviously a different one than the Appeal Board had before it in Consumers.
The task of thia.. Appeal Board is, of course, to apply the law as it understands it to this new set of facts.
In so doing, we believe there certainly is room for scme refinement, and in a few instances correction, of the modes of analysis set i
forth in ALA3-452.
In an effort to highlight what Applicants perceive to be the essential points of departure, we will ccm-mence our discussion with the obvious factual differences be-tween this proceeding and consumers.
A.
SIGNIFICANT MARKET STRUCTURE DIFFERENCES BETWEEN THE MICHIGAN LCWER PENINSULA AND NORTHERN CHIO-WESTERN PENNSYLVANIA The most striking feature of the Censumers Appeal Board's analysis of the Michigan lower peninsula market is the relatively large quantity of self-generation by the small electric systems.
See generally ALA3-452, slip op at 99-100.
Only six of the 23 municipal systems in that region are full requirements wholesale customers of a large privately-owned electric utility (id. at 97);
nine generate the great bulk of their own power needs (id. at 95-97); and the remaining eight generate a part of their own needs and purchase the rest of their power requirements from others (id.
at 97 & n.215).
Likewise, the two G & T cooperatives self-generate most of their needs (id. at 93).
All told, the small Michigan systems have about 1000 mw of generating capability.-1/
2/
In comparison,- of the 46 municipal systems in northern Ohio and western Pennsylvania only two generate the majority of 1/
While ALAB-452 reports that the total generating capacity of the non-Consumers systems was approximately 800 mw, or 70% of their own firm pcwer requirements (slip op, at 99), adding up the previously reported generating figures for Lansing (628 mw),
Holland (81.5 mw), Edison Sault (73 mw), Northern Michigan (61 mw),
Wolverine (57 mw), Grand Haven (38.6 mw), Traverse City (35.6 mw),
Coldwater (16.6 mw), Zeeland (14 mw), and Alpena Power (7 mw),
gives a total generating capacity of 1012.3 mw.
-2/ It should be understecd that, unlike the situation in ALAB-c 452, this proceeding is not simply confined to a single hemogeneous market setting.
Rather, the conduct of each of the five Applicant ccmpanies must be assessed in the centext of the market structure existing within the service area of each company.
Despite the mis-guided attempts by the opposing parties and the Licensing Board l
below to resolve this proceeding in terms of an artifically con-structed "CCCT," there is no basis in fact or law for such an un-discerning, broad-brush approach to this Ccmmission's antitrust responsibilities.
See App. Opening 3r. at 23-25 & n.30, 293-94.
their own power needs; 42 systems are full requirements wholesale customers; and the remaining two are cartial requirements 3/
customers.
At the close of the record the total operating 4/
~
capacity of municipal systems was arcund 100 mw.
With refer-ence to the 11 rural electric cooperatives located in northern Chio (there are none in western Pennsylvania), they all receive their full requirements from Buckeye Power, Inc. as wholesale 3/
~
In the TECO area, all fifteen of the municipal systems are full requirements wholesale custcmers.
Those systems are:
Bowling Green, Bradner, Bryan, Custer,_Edgerton, Elmore, Genoa, Haskins, Montpelier, Napoleon, Oak Harbor, Pemberville, Pioneer, Tontogoney (which is served by Bowling Green and, thus, indirectly by TECO), and Woodville.
In the CE area, twenty-one of the municipal systems are full requirements wholesale customers: Amherst, Seach City, Brewster, Columbiana, Cuyahoga Falls, Galion, Grafton, Hubbard, Hudson, Lodi, Lucas, Milan, Monroeville, Newton Falls, Marshallville (which is served by Orrville), Niles, Prospect, Seville, South Vienna, Wadsworth and Wellington.
There is, in addition, one partial requirements custcmer (Oberlin), and one other municipal system, located on the far edge of the OE service area which generates the majority of its power needs and has almost completed plans to interconnect with Chio Power Ccmpany.
In the CEI area, 'sinesville generates the majority of its power needs, while Cleveland is a partial requirements wholesale customer.
In the Duquesne area, Pitcairn is a full requirements whole-sale customer.
In the PP area, all five municipal systems are full require-ments wholesale customers.
Those systems are: Ellwood City, Grove City, New Wilmington, Wampun and Zelienople.
-4/
The generating capacity of municipal systems is as follows:
Oberlin - 12.9 mw net dependable capacity (D-594, schedule 16);
Orrville - 39.2 mw net dependable capacity (D-593, schedule 16) ;
Painesville - 38 mw installed capacity (Pandy 3299 (8)) ;
Cleveland - while Cleveland allegedly has a net demonstrated capability of ISO mw (see C-161(Mayben) 8 (14 ) ), on cross-exami-nation Mr. Mayben, Cleveland's expert technical witness, conceded that Cleveland's working capacity has been as low as 10 mw (Mayben 7650(10-16)). Even crediting the Cleveland system with 15 mw of capacity, which may well overstate its capabilities (see App. Br. Opposing Exceptions Filed by the City of Cleveland, Exhibit A), the total generating capacity of the non-Applicant systems would be 105.1 mw.
6-power custcmers under 35-year contracts (see S-188, Appendix B; see also App. Reply Br. at 46 n.42).
Thus, there is a dramatic difference in market structure on i
the facts of this proceeding when compared with the factual under-pinnings in Consumers.
This difference is highly significant for a number of reasons.
First, as ALAS-452 expressly states: [A] utility without i
any generating capacity of its own * *
- cannot rely on coordina-tion power to meet its customers' firm power needs."
Slip op. at 142.
Indeed, the cross-examination of Dr. Face is cited approv-ingly for the proposition that "'there would be no point' for (a nongenerating) utility to contract for coordination power and associated services."
Id.
This is, of course, precisely the point Applicants have been emphasizing throughout this proceeding.
See App. Opening Br. at 16-17 & n.20, 95-96, 102-05; App. Reply Br. at 43, 74-75.
It is of importance here because such a market structure necessarily impacts on the relevancy of any coordination services market in the present context (see pp. 21-22, infra).
More-over, realization that the nongenerating municipal entities in northern Ohio and western Pennsylvania are unsuitable as coordination partners bears directly on the reasonableness of Applicants' al-leged unwillingness to coordinate with such entities (see pp.
38 44, inf ra)'.
Second, the conclusion reached in ALA3-452 that coordination services are, in the Michigan market setting, significantly less expensive than wholesale power purchases (see slip op. at_151-56),
simpl'y does not follow in the factual context of this proceeding.
The Consumers reasoning in this area was based on an analysis of
i the impact of Consumers' ratchet clause (id.).
However, where an entity needs a source of power full-time -- as is true of utilities lacking self-generation -- the impact of the ratchet clause has little, if any, pricing significance (see ALA3-452, slip op. at 149).-5/
-5/ More important in such situations is the manner in which the energy charge is calculated.
The conclusion in ALA3-452 that the energy charges in a wholesale power contract and a coordination ser-vices contract are " roughly the same" (slip op. at 151-52 & n.328),
is generally (as here) not true.
The energy charge for wholesale power is based on an average, system-wide cost (see App. Opening Br.
at 127-28).
This means that the purchasing entity shares in the benefits of low energy cost nuclear units, as well as the burdens of high energy cost oil units.
In comparison, the various coor-i dination service schedules (but for economy interchange) typi-cally price the energy cost at out-of-pocket expenses plus 10%
(see Singham 8272(21-22), 8296(4-9), 8291(4-6)).
Thus, the pur-chaser pays for the incremental cost of supplying the additional energy and, therefore, is not likely to receive any of the energy cost benefits associated with nuclear plants.
Moreover, when a utility is selling power to more than one entity pursuant to a j
coordination service schedule, an energy cost " pecking order" is established.
A purchaser buying power under a limited-term schedule (which has higher demand charges than short-term or i
emergency power) will have its energy costs computed before an 1
entity purchasing short-term power; and the short-term power pur-chaser will have its energy costs computed before an entity pur-chasing emergency power (see Bingham 8290-91).
And, where two entities are purchasing power under the same coordination schedule, the entity first requesting power will have its energy costs calcu-i lated first (see Bingham 8290(6-18)).
As a result, the energy cost of such power varies depending on the service schedule it is pur-chased under, the timing of-the purchase request, and the incremental costs to the seller at the time of sale.
The resulting cost dif-ferences can indeed be very significant, as the facts surrounding CEI's power supply relationship with Cleveland confirm.
f Pursuant to FPC order, CEI was selling power to Cleveland under a schedule that included emergency, short-term and limited-l term pricing elements (see S-204, schedule A; Bingham 8297-99).
In 1976 a firm power or wholesale contract.was negotiated under which CEI offered to sell Cleveland power on the basis of average, cystem-wide costs (see A-271).
Given the Cleveland system's long-term need for relatively large quantities of power, it chose to receive service under the wholesale contracu, notwith-standing that the demand charges under such a contract were sig-nificantly higher than the demand charges associated with the various coordination service schedules.
Wholesale power was less expensive for Cleveland because the energy charges under the whole-sale contract were less than the ecmparable energy charges under the coordination service schedules.
_a-Consequently, Applicants' pcsition that the full benefits they 6
derive frem coordinated operation and development are passed on to the non-Applicant entities (which are their full requirements customers) by way of wholesale power sales (see App. Opening Br.
at 104-05, 127-28; App. Reply Sr. at 20 & n.19) is not only an accurate statement with respect to this proceeding, but also has not been undermined at all by the contrary conclusion reached under the different circumstances involved in ALA3-452 (ccmpare slip op, at 426-27).
Third, the lack of appreciable self-generation among the northern Ohio and western Pennsylvania municipal and rural elec-tric cooperative systems bears directly on the ability of those systems to be viewed as actual or potential competitors of Appli-cants in any relevant market.
Obviously, with respect to the coordination services market, the previous discussion demonstrates that these other systems neither compete with Applicants to sell coordination services to others nor compete with Applicants to purchase coordination services f cm others.
Moreover, the econom-ic barriers (see App. Opening 3r. at 45-50; App. Reply Br. at 27-29) and legal restraints (see App. Opening 3r. at 50-56; App.
Reply 3r. at 29-36) that initially precluded the establishment of appreciable self-generation in this market area, make it extreme-ly unlikely that any such ecmpetition might potentially develop in the future (see App. Opening Br. at 95-97; App. Reply 3r. at 43).
Similarly, in the wholesale pcwer market the ncn-Applicant systems do not now (see App. Opening 3r. at 65-71), and are not in the futur likely to (see App. Reply 3r. at 40-46), compete
,w.-
3
9-with Applicants in the sale of wholesale power to others.
Nor when viewed from the other side of the coin -- that is, the altogether different mode of ccmpetition for the purchase of wholesale power (see Kampmeier 5758-59(12-25 & 1)) -- can it be said that such ccmpetition exists between Applicants and non-Applicant entities, since Applicants self-generate their own nesas and, therefore, rarely, if ever, enter the wholesale market to purchase firm power from others.
Thus, although the smaller systems either purchase wholesale power frem an Applicant or from a must 6/
non-Applicant source,-
Applicants plainly do not compete with them as purchasers in the wholesale market.
7/
FLnally, with respect to the retail market, the absence of measurable self-generation, when evaluated in the context of the extant economic and legal barriers to retail competition in northern Ohio and western Pennsylvania, effectively eliminates all prospects of actual or potential ccmpetition at retail between non-Applicant entities and Applicants (see App. Opening 6/
The reference in the text to non-Applicant wholesale power sources should not be understood to suggest that any such sources do exist for municipal systems in northern Ohio and western Pennsylvania.
Indeed, the record below fails to reveal any such potential power source (see App. Opening Br. at 67-70).
This absence of alternative wholesale suppliers should not, however, be view 2d as conferring monopoly power on Applicants.
For, as we explain later, Federal Energy Regulatory Commission ("FERC")
jurisdiction over wholesale power sales removes Applicants' ability to set prices or exclude competition in the wholesale i
market (see pp. 26-27, infra), ir the absence of a demonstrated abuse or attempted abuse of the regulatory process (see App. Reply 3r. at 53-54).
7/ Applicants also believe that the retail market is not relevant for assessing in this proceeding the conduct. challenged as in-consistent with Section 2 of the Sherman Act.
Compare App.
at 38 with ALAB-452, slip Opening Br..at 89 and App. Reply 3r.
op, at 172 n.360; see also pp. 22-24, infra.
Br. at 60-65; App. Reply Br. at 39-40).
Putting aside for one mcment the treatment in ALAB-452 of the "open" and " closed" checkerboard approach to retail markets -- an approach also urged by Applicants here, and one which we continue to believe
_ has vital!.y on the facts of this case (see n.20, infra) the Appeal Board's emphasis on the " potential competition that exists by virtue of each local government's right to replace its existing retail power supplier" (ALA3-452, slip op.
at 182), indicates to us a clear recognition that the door-to-door direct competition postulated in this proceed?.ag by DOJ, the NRC Staff and Cleveland is simply not a viable concept.
We believe the rejection of that concept to be particularly sound in the context of this market structure, as we have heretofore explained (see App. Opening Br. at 60-65).
As for the potential at the retail level for " franchise com-petition", as described in ALAB-452, we will have more to say about that matter in a moment (see pp. 23-24, 30-32 infra).
For now, however, it is important to note that conceptually such
" competition" differs dramatically from the direcu door-to-door competition normally evaluated in antitrust cases.
Indeed, such retail " competition" is so unique that its viability depends on no factors relevant to the retail marketing function.
Rather, a municipal system's entry into the retail market in this manner depends on its ability either to construct generating facilities on its own (in which case the municipality may or may not also require coordination services) or to purchase wholesale power from a generating entity with sufficient capacity to provide such t
l Power.
l,
In northern Ohio and western Pennsylvania, however, the lack of any appreciable self-generation among the municipalities strongly suggests that, if any such. franchise competition does ever take place in this market, it will not be by means of con-structing new facilities, but rather through wholesale power 8/
purchases.-
This is of no small consequence.
As we have al-l ready indicated, Applicants and municipal systems do not compete 1
with each other to purchase wholesale power.
Thus, even in terms 4
of the remote possibility of " franchise competition", such a prospect is insufficient in this market setting to make out a case for the existence of a potentially ccmpetitive situation be-tween any Applicant and non-Applicant entity (see also n.27, infra).
Moreover, the exercise by a municipal system af its franchising power depends not at all on an Applicant's position in, or share of, the retail market, but only on the municipal S/
~
This conclusion is fact-based and is unique to northern Ohio and western Pennsylvania.
7hether it is true in other areas de-pends on the particular market facts present elsewhere.
Factors relevant to a municipality's decision to self-generate or pur-chase wholesale power include:
the size of the municipality to be served compared to the applicable scale economies, the avail-ability of icw cost power alternatives, the distances and costs associated with long-term power transmission, 'he ability to raise large capital sums through taxes or bonding to finance gen-j eration, and, perhaps, the region's traditional methods of doing i
business.
The lack of self-generation in this case demonstrates that,-taken together, these factors lean heavily in favor of whole-sale power.rather.than self-generation.
The fact that the Supreme Court in Otter Tail or the Appeal. Board in Consumers may have found self-generation, and a need for coordination services, to be a viable alternative in the factual settings presented by those cases provides no support for such a conclusion in this case.
Before a contrary result can be reached here, it must be demon-strated, upon..an.. application.of..the criteria enunciated in United i
States v...Falstaff Brewing Corp.,.410 U.S.
526.(1973), and in United States v. Phillips Petroleum Co., 367 F.
Supp. 1226 (C.D.
Cal. 1973), that the municipal systems can properly be labeled as potential competitors.
No such evidentiary showing was made, or even attempted, in this proceeding.
See-App. Reply Sr. at 44-46.
system's ability to make wholesale power purchases.
Such whole-sale transactions are, of course, subject to comprehensive control by FERC; accordingly, in this area as well, the potential for " franchise competition" has been placed by regulatory legis-lation outside of Applicants' control.
See n.6, supra; and see pp. 26-27, infra.
In summary, then, the significant differences in generating capabilities between the small non-applicant systems located in the Michigan lower peninsula, on the one hand, and the small non-Applicant systems located in the northern Ohio-western Pennsylvania area, on'the other hand, require this Appeal Board to reach cen-clusions on the facts of record here which, while not taking issue with Consumers' evaluation of the facts it was given, are at variance with the results reached there with respect to:
(1) the coordination services market, (2) the cost of coordination power versus wholesale power, and (3) the existence or nonexistence of competition in any relevant market.
Nor should this come as any surprise.
Obviously, Consumers does not serve as a blueprint for all antitrust review of electric utilities undertaken by this Canmission any more than a single antitrust case in the judicial arena autcmatically disposes of all others.
The principles an-nounced in one market setting frequently require another result when applied in a markedly different market setting.
Such is the case here.
We would in this connection make one additional observation concerning market structure that serves to underscore the point:
namely, that the historical development of the market participants in northern Ohio and western Pennsylvania differed in certain l
material respects from the historical development of the market participants in the lower peninsula of Michigan.
As in the Consumers proceeding (see ALA3-452, slip op. at 49 n.68), the initial acquisition of market dominance by the Applicants in this case was neither challenged by any party, nor otherwise placed in issue and litigated.
The Licensing Board below explicitly found that the development of the individual Applicant companies as large, horizontally and vertically integrated utilities was due, in part, "to natural scale economies, technological advances such as alternating current, and improved transmission techniques" (I.D. at 109; see also App. Opening Br. at 100-02 & n.120).
Both technical and economic evidence was introduced in some detail at the hearing to support this finding and to show the econcmies achieved through the vertical integration of the Applicant ccm-panies (see App. Opening Br. at 46 & n.49; App. Reply 3r. at 27-29
& n.27). None of this evidence has ever been disputed.
By ccm-parison, as stated in ALAB-452, "[n]either Consumers nor any other party (in that proceeding] offer [ed] any technical or economic reasons that require the two functions
[i.e., production and transmission] to be combined in one ccmpany" (slip op, at 206-07).
This record difference is of central inportance, because the technical and economic evidence introduced in the instant proceed-ing on this point also confirms that those few municipal systems l
which left the northern Ohio-western Pennsylvania market after 9/
September 1, 1965,-
did so not because of any anticcmpetitive
-9/ The Licensing Board below ordered a September 1, 1965 cutoff date on discovery, and, but for good cause shown, adopted that (continued next page)
, conduct on the part of any Applicant, but because those electric systems were in a sorry state of disrepair by reason of financial and technical inattention over the years.
See generally App.
Opening Br. at 101 n.120.
These acquisitions of "failing systems" simply will not support the general conclusion reached on other facts in ALA3-452 that a goal of municipal acquisition suggests an " intent *
- to monopolize the retail and wholesale power markets" (slip op, at 298, quoting from 2 N.R.C. at 104).--10/
Compare United States Steel' Corp. v. Fortner Enterprises, Inc.,
11/
97 S. Ct. 861, 863-64 n.1 (19 7 7 ). --
Nor will the mere fact that such acquisitions occurred sup-port a conclusion that Applicants here have actually monopolized any market by using their market dominance in a manner intended to 9/
(cont'd)
Hate in limiting evidence during the hearing (see I.D.
at 93 n.**).
As to the period before the cutoff date, the Licensing Board properly stated that it " draws no anticompetitive inference frcm the trend toward concentration prior to 1965 * * *" (I.D. at 109).
10/
In this regard, the failing nature of the acquired systems, like the investment motive found in United States v. Jerrold Electronics Corp., 187 F.
Supp. 545, 568 (E.D. Pa. 1960), aff'd per curiam, 365 U.S.
567 (1961), negatives a general intent to monopolize any market.
Ccmpare ALAB-452, slip op, at 290 n.516.
--11/
In Fortner II, the Supreme Court reversed a finding by the district court that petitioners had violated Section 2 of the Sherman Act, noting that "' increasing sales' and ' increasing market share' are normal business goals, not Corbidden by S 2 without other evidence of an intent to monopolice.
The evidence in this case does not bridge the gap between the District Court's findings of intent to increase sales.and its-legal conclusion of conspiracy to monope! ice."
97 S. Ct. at 864 n.l.
While the Court also remarked that petitioners lacked a dominant market position, that conclusion was not essential to its holding.in the quoted. language above.. See also General Cec =unications.
Engineering, Inc. v. Motorola Ccmmunications & Electronics, Inc.,
421 F.. Supp. 274, 286 (N.D. Cal. 1976) (applying standard where specific intent to monopolize is alleged).
15 -
maintain that position of dominance.
In the first place, such a thesis would have no application whatsoever to CEI or Penn Power, since neither of those two companies acquired any systems during the relevant time period.
For that matter, the relative market share between CEI and Cleveland has not changed in any appreciable way since September 1965, notwithstanding that the City, as a whole, experienced a significant decrease of more than 10% in the number of customers taking service frcm either CEI or the municipal system during these years (see Appendix A).
As for the few acquisitions by the other Applicants, the evidence; chows conclusively that the acquired systems were so snail a:1d ineffective as to preclude any suggestion that they were of competitive significance.
Thus, Duquesne Light's sole acquisition, the Aspinwall borough system, had a peak load of about 1.5 mw or about six one-hundredths of one percent of Duquesne Light's system peak (see Appendix B).
Likewise, the combined loads of the two systems acquired by Toledo Edison --
Waterville and Liberty Center -- mmounted to less than 2.5 mw or about two-tenths of one percent of Toledo Edison's system peak (see Appendix B).
Finally, the four small systems acquired by Ohio Edison had a total combined peak load of less than 22.5 mw or about one-half of one percent of the Ohio Edison system peak (see Appendix 3).
All told, the average size of the acquired systems was less than 3.8 =w, and the median size was but 1.6 mw (see Appendix B).
Recognition of these uncontesnea facts, when considered along with the internal difficulties that each of the acquired system". was experiencing at the time of acquisi-tion due to its own financial and managerial problems, removes entirely any inference of wrongful intent on the part of the ac-12/
quiring Applicants.
Nor is this conclusion undermined in any respect because one or another of the Applicants may have expressed a company goal to 13/
acquire municipal systems (see App. Opening Br. at 98-102).
While the decision in Consumers makes reference to the observation by the Supreme Court that " knowledge of actual intent is an rid" in determining anticompetitive purpose or effect (ALAB-452, clip op. at 297 n.539), application of that rule here presumes that 2
statements by ccmpany personnel on acquisition goals in a natural monopoly industry are reflective of an " actual intent" to monop-olize.
That premise, however, is the very point Applicants dis-
--12/Language in ALAB-452 arguably might be construed to indicate that the small size of the acquired systems is irrelevant.
See slip op at 289-90.
Such a reading of the decision would, how-ever, be inaccurate.
All we understand the Appeal Board to have held is that, as a matter of law, the fact that an acquisition may be lawful under Section 7 of the Clayton Act does not mean that it cannot be evidence of a general intent to monopoli:e.
The Appeal Board did not go further and hold that acquisitions will always support the general intent 'inding.
The evidence in this proceeding shows that the snM.1 size of the acquired systems was a major reason for their inability to continue providing in-expensive and reliable service (see A-139 (Gerber) 12-23; App.
Opening Br. at 101 n.120).
As we already have indicated (see n.10, supra), the failing nature of the acquired systems is sufficient to prevent, as a matter of fact, a finding of a general intent to monopoli:e ou the basis of the acquisitions.
We would only add that if the citation to United States v.
First National Bank & Trust Co. of Lexington, 376 U.S. 665 (1964)
(see ALAB-452, slip op, at 289-90 n.516), means that an acquisition otherwise lawful under Section 7 of the Clayton Act can be con-denned under Sections 1 or 2 of the Sherman Act, it is clearly incorrect.
- See, e.g.,
Credit Bureau Reports, Inc. v.
Retail Credit Co.,
358 F. Supp. 7TO, 794 (S.D. Tex. 1971).
--13/There is nothing in the record which even arguably could be said to evidence such a company goal on the part of OE or PP.
t pute.
Such statements in a market setting such as this one re-flect nothing more than the expected, and indeed the desired, result in a natural monopoly situation, i.e.,
that the market can, and for very legitimate reasons should, ultimately sustain but a single entity. 4/
1 On these terms, we continue to believe that Consumers ' posi-tion to the effect that " success in a natural monopoly situation cannot be unreasonable per se" (slip op. at 285 n.510) is well taken; nor do we find the footnote response in ALA3-452 to this
--14/There will, of course, be some limited competition of an "in-fra-marginal" nature dIring the " transition" period prior to the emergence of a single deminant firm.
ALA3-452 misconstrues the significance of this competition by noting that if Consumers had acquired its last competitor "the market would remain but the competition would be gone" (slip. op, at 211).
The error in this analysis arises from attributing to the market an expectation that competition is a continuing concept in the context of this case.
While such an expectation might be true in other market 4
settings, it certainly is inaccurate with respect to the natural monopoly for production and distribution of electric power in northern Ohio and western Pennsylvania.
Further evidence of a failure to appreciate fully the signi-ficance of the natural monopoly nature of the electric utility industry is found in the Const?mers Appeal Board's rejection of a part of the company's market analysis her tuse, as stated in ALAB-452, acceptance of the utility's argument would make it "impos-sible to find Consumers guilty of monopolization even if it had used predatory means to acquire the small systems" (ALA3-452, slip op. at 199 n.392).
Such a response suffers from overstate-ment.
Obviously, even in a natural
- nopoly market environment, where it can be proven that the dcminant utility possessing monopoly power used predatory means to hasten the demise of a small system, and so acquire its dominant position, monopoliza-tion is established.
That conclusion does not pernit, however, a quantum leap to a finding of monopolistic intent under different circumstances, such as presented in the instant case, merely because small systems left the market, without a showing that such 4
exit was the result of predatory conduct.
Such reasoning is simply untenable here, where the evidence of record demonstrates the failing nature of the acquired systems as the causative effect of their eventual demise.
-15/
sound reasoning to be particularly helpful. ~
There, the Appeal Board has addressed Consumers' argument in the context of whether predatory conduct must be proved to show an inconsistency with Section 2 of the Sherman Act.
That is, however, quite a different question from the one which is relevant to the position we urge here --
i'.e., whether a utility's declaration that it desires to succeed in a natural monopoly market by acquiring other electric systems is evidence of an intent to monopolize.
The cited authorities do, we submit, require a negative response to that inquiry.
Nor is the footnote in ALAB-452 on solid ground with its dismissal of those cases having reference to a " natural monopoly situation" by pointing to Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S.
481 (1968).
Hanover Shoe neither mentioned nor dealt with the natural monopoly situation.
We have previously cautioned against the doctrinaire use of antitrust principles formulated in a much different market context to dis-pose of matters that necessarily assume another character when viewed in light of the market setting in this industry (see App.
Opening Br. at 98-100; App. Reply Br. at 57-61).
The point we wish to stress is simply this:
unl?.ke the analysis in ALAB-452, the Appeal Board here should not undertake
\\
--15/ In addition to the cases listed in footnote 510 of ALAB-452, Applicants-would direct the Appeal Board's attention to:
Green-ville Publishine Co.-v. Daily. Reflector, Inc.., 496 F.2d 391 (4th Cir. 1974).; Philadelphia World Hockey Club, Inc.'v. Philadelphia Hockey Club,.Inc.,.351 E.
Supp. 462 (E.D. Pa. 19 72) ; ovr:ron.. Corp.
- v. General Motors Corp., 295 F. Supp. 3.73 (S.D.N.Y. 1969); United States v. Harte-Hanks Newspapers, Inc., 170 F. Supp. 227 (N.D.
Tex. 1959); United States v. Western Union Telecrach Co-.,.53.F.
Supp. 377 (S.D.N.Y. 1943); Shenefield, An 1:rusu Policy Within The Electric Utility Industry, 16 Antitrust Bull. 681 (1971).
its assessment of the challenged conduct frcm the starting point that these Applicants, because of past acquisitiens, necessarily have a general intent to monopolize a relevant marker.
- Rather, the application of antitrust principles to the facts of record in this proceeding should recognize the need to examine both the monopoly power question, and the separate issue as to whether any of these Applicants demonstrated a " deliberate or willful pur-16/
pose to exercise monopoly power",--
without any preconceived notions of culpability based on judicial pronouncements that at-tached antitrust significance to market dominance in factual settings not present here.
Proceeding on this basis, we believe, for the reasons which follow, that the Appeal Board will find 16/
We perceive in some of the language of ALAS-452 a view to inter-pret the conduct element of the monopoli:ation offense as broadly as it has ever been interpreted by any court and then to apply that liberal interpretation to a factual setting vastly different than that heretofore presented to the courts (see, e.g.,
slip op, at 58-59, 293-86).
Such a view is certainly not required by previous judicial precedent and Applicants would urge against such an ap-proach here.
Instead, we would recommend the approach taken by the Second Circuit in International Rys. of Central America v.
United 3 rands Co., 532 F.2c 231 (2d Cir.), cert. denied, 97 S.
Ct. 101 (1976).
The applicable rule was therein stated as follows (532 F.2d at 239):
While we 7:ree that a specific intent to monopolice need maly be found in a case where a defendant is charged with ccaspiracy or attempt to monopolize (citations cnitted), it does not follow that any act of the al-leged monopolist irrespective of intent constitutes a section 2 v 71ation.
Judge Hand's comment was that no monopolist " monopolizes" (emphasis in original) un-conscious of what he is doing.
The action alleged-to offend section 2 must be one which is monopolistic.
The Supreme Court has clearly indicated that in order to establish such a section 2 violation,-the plaintiff must establish that the defendant had a deliberate or will-full purpose to exercise monopoly power.
[ Citations emmitted.]
that the conclusions reached by Consumers on these other issues are not warranted in this case.
3.
ANOTHER LOOK AT RELEVANT MARKETS AND MONOPOLY POWER PRINCIPLES IN THE NORTHERN OHIO-WESTERN PENNSYLVANIA AREA IN LIGHT OF ALAS-452 We have previously set forth in great detail Applicants views of the relevant markets for purposes of the present anti-trust inquiry (see App. Opening Br. at 88-90, 93-95; App. Reply Br. at 38-46).
Our assessment of whether any of the Applicant companies possesses, or is likely to possess, monpoly power in any of those markets has also been fully created (see App.
Opening 3r. at 91-93, 95-97; App. Reply Sr. at 47-56).
There is neither room nor need to rehearse those positions here.
- Instead, we will concentrate our discussion aM this stage on pointing out where our earlier analysis conforms with the decision in ALAB-452, and, conversely, where the two analyses differ, including in the latter instance, some suggestion for reconciliation.
The start-ing point is, of course, with market definitions.
1.
The coordination services market.
The "coordina-tion services" market defined in ALAS-452 consists of that " cluster of products and services" typically referred to in the electric power industry as " operational coordination" (slip op. at 121).
However, the Consumers Appeal Board specifically rejected the effort also to include in that market those forms of coordination typically referred to as " developmental coordination" (id. at 167).
In so doing, that Appeal Board effectively sounded the death knell to the various proposals here by DOJ, the NRC Staff and Cleveland to lump developmental coordination into their general market definitions -- an approach erroneously adopted by the Licensing 1
Board below.
Applicants have opposed any such indiscriminate bundling of services (see App. Opening 3r. at 93-95; App. Reply 3r. at 41-43), and thus ue are in fundamental agreement with the more refined delineation of a " coordination services" market 17/
in the coherent manner expressed in ALAB-452.
- Indeed, Consumers' coordination services market corresponds to the "short-term operating coordination transactions" submarket described by Applicants' expert economist, Dr. Pace, in this proceeding.
Compare A-190(Pace) 31(10-16); App. Opening 3r.
at 95.
It still remains to be determined whether any of the Appli-cant companies can be said to have monopoly power in this par-ticular coordination services market.
We have maintained not, and i
continue to adnere to that view.
The non-Applicant entities in northern Ohio and western Pennsylvania neither need, nor can they participate in, the coordination transactions in this market (see App. Opening 3r. at 95-96; App. Reply Br. at 43). Thus, Applicants cannot compete with, or exercise monopoly power against, non-Applicant entities (either actual or potential) in this market.
The inescapable conclusion in such circumstances is, therefore, that on the facts of this case the coordination services market
--17/Because the coordination services market is not relevant to this proceeding, the Appeal Board need not reach the question here of the geographic bounds of such a market.
We would note in
~
passing, however, that-the f acts of record in this proceeding would, in any event, not support delineation of a submarket measured either in terms of the CCCT (Ccubined CAPCO ' Company Territories) or in terms of each Applicant's service area.
Com-pare ALAB-452, slip op, at 168-71 with App. Opening 3r. at 97-98 n.ll6.
22 -
18/
is not relevant to the present inquiry.
Indeed, the Appeal Board's decision in Consumers has already foreshadowed this result (see p. 6, supra).
2.
The retail market.
We are equally convinced that the market for retail distribution of electric power is of no relevance to this proceeding (see App. Opening Br. at 89; App.
Reply Br. at 38).
In this regard, Applicants here are in dis-agreement with the retail market analysis of the Consumers Appeal Board (see ALAB-452, slip op. at 172-200).
The sole basis set forth in ALA3-452 for finding relevancy at this market level is that
"(a] utility's bulk power practices can have sericus anticompeti-tive effects on the retail market *
(ALA3-452, slip op, at 172 n.360).
Even accepting that conclusion, however, it provides no good reason for attaching any importance to the retail activi-ties of any of the Applicants here.
As the Consumers Appeal Board fully recognized, there is little direct, door-to-door re-tail competition in this industry (see ALA3-452, slip op at 179-80).
In fact, such a situation exists only in the City of Cleveland in the present case (see App. Opening Br. at 61 n.69).
To the extent that the door-to-dcor competition there may have been indirectly affected by CEI's " bulk power practices" (and no evidence suggests as much), the antitrust concern (if any) is properly at the wholesale level where the alleged suspect prac-
--18/ In his prepared testinony, and then again during cross-examina-tion, the staff expert econcmist, Dr. Hughes, testified that market power is always exercised with respect to some identifiable group of market participants, either actual or potential (see S-207 (Eughes) 9(15-18); 3937(6-10)).
Obviously, in the absence of such actual or potential market participants the delineated market cannot be viewed as relevant.
23 tices are said to have taken place, not at the retail level where 19/
it is claimed that some residual impact has perhaps been felt.
Nor do we find the situation to be any different if, as in ALAB-452 (slip op, at 180), the emphasis at retail is, instead, on the potential " competition for the right to be the sole dis-tributor in these individual natural monopolies".
Obviously, pro-tection of such potential competition turns solely on factors af-fecting the municipal systems' ability to purchase in the wholesale market, not on their ability to sell in the retail market.
See Alabama Power Co. (Joseph M. Farley Nuclear Power Plant, Units 1 and 2), L3P-77-24, 5 N.R.C.
804, 889-90 (1977); App. Reply 3r.
at 38.
Concerns of this nature both can and should be resolved by analyzing the competitive situation (such as it is) at the wholesale level; retail activities are of no relevance to the per-tinent antitrust inquiry in such circumstances and the retail
--19/The situation here should be contrasted to that considered by the Supreme Court in United States v. Griffith, 334 U.S. 100 (1948).
There, the government claimed that the defendants had used the theatre circuit buying power inherent in their retail monopoly to gain a competitive advantage over unaffiliated firms in negotiating the purchase of films from distributors.
The Court agreed with the government's position, holding "(w] hen the buying power of the entire circuit is used to negotiate films for his competitive as well as his closed towns, he is using monopoly power-to expand his empire."
334 U.S. at 108; see also id. at 109; Schine Chain Theatres, Inc. v. United States, 334 U.S. 110 (1948).
By comparison, in this proceeding, there never has been a claim that any Applicant has attempted to use its dominance at the re-tail level to secure more favorable wholesale power terms.
- Thus, there is no need here to analyze the retail market to determine whether Applicants do or do not possess monopoly power.
For, un-like Griffith and associated cases, even if monopoly power existed at the retail level -- and it does not -- such power would not bear on the lawfullness of the conduct challenged in this proceed-ing.
market thus should properly be considered of no significance by this Appeal Board. --20/
3.
The wholesale market.
This still leaves, of course, the wholesale electric power market.
The Consumers Appeal Board found this to be a relevant market on the facts of that case, and then proceeded to resolve the dispute among the parties as to the makeup of that market (see ALAB-452, slip op at 200-12).--21/Appli-cants here have included similar wholesale pcwer transactions within the submarket defined by long-term developmental cocrdina-tion transactions (see App. Opening 3r. at 95), and, therefore, do not object to an antitrust analysis which proceeds on the basis that wholesale power sales constitute a relevant market for pur-poses of this proceeding (see App. Opening Br. at 95-97; App.
Reply Br. at 44-46).
20/
If the retail market is to be viewed as at all relevant, analysis of that market should proceed on the basis of the "open" and " closed" checkerboard of markets Applicants have previously advanced (see App. Opening Br. at 89-93).
While this approach was rejected in ALAB-452 (see slip op, at 172-200), this was cnly because the Appeal Board there operated on the faulty premise that protection of potential franchise competition was a legiti-mate concern at the retail level.
If, as we believe (see pp. 30-32, infra), this " protection" is more appropriately addressed under the wholesale market analysis, the checkerboard concept plainly still has vitality at the retail level.
The point we wish to emphasize here is simply that the evaluation of direct retail competition in the electric utility industry should be undertaken i
on the basis of the various "open" and " closed" markets shown to exist.
1 21/
Applicants here, like Consumers, challenged the inclusion of their "in-house" self-generation as part of their share of the wholesale market (see App. Opening Br. at 96 n.ll4).
Even accept-ing the contrary analysis in ALA3-452, we do not consider such reasoning to require the same conclusion here.
This is because the lack of self-generation among the municipal systems in northern Ohio and western Pennsylvania realistically removes such entities (continued next page)
~, -..
e
. At this point, however, we part company wi*k -ke wholesale market analysis of the Consumers Appeal Board, especially with the significance ALA3-452 attaches to statistical market shares (ALA3-452, slip cp. at 240-42).
Applicants here have repeatedly argued against any assessment of monopoly power on the basis of market share statistics (see App. Opening Br. at 85-88).
- Rather, we have urged that it be determined, on the basis of the economic and institutional realities in the marketplace, whether any App-licant in fact has "the power to control prices or exclude competition" in the wholesale market (see App. Opening Br. at 84).
Since the Licensing Board below chose not to engage in such an analysis, its " imputed" findings of monopoly power are, we believe,
entitled to no weight.
The discussion in ALA3-452 concerning the matter of monopoly power at the wholesale level (see ALAB-452, slip op at 243-61) plainly cannot be so easily dismissed, however.
Accordingly, we will take a moment to evaluate that discussion in light of the arguments advanced here by Applicants, keeping in mind as we do so the distinguishing factor here hhat the non-21/ (cont ' d)
IEom the market to sell wholesale power (see pp.
8-9, supra).
j Thus, "in-house" self-generation should be excluded from the wholesale market shares of all entities, not because the munici-pal systems are unlikely to supply Applicants' wholesale "needs,"
but because those systems do not now, and are unlikely in the future to, supply the wholesale needs of any market entity. It therefore, matters not in this proceeding whether, as a theoretical matter, Applicants' self-generation " reduces pro tanto the demand for wholesale bulk firm power", since in the reali:1es of the l
marketplace there are no municipal entities, either actual or potential, that sell wholesale power.
In any event, we continue to believe, for the reasons stated below, that little purpose is served by calculating market shares in the context of this proceed-ing, whatever computational formula may be used.
- Applicant entities in this proceeding (unlike in Consumers) lack appreciable self-generation.
Turning first to those non-Applicant electric entities al-ready in the wholesale market, we have previously observed that their lack of self-generation effectively removes such systems from meaningful consideration as sellers of wholesale power.
Thus, to the extent the Consumers wholesale analysis is focused in this area (g[. ALAS-452, slip op. at 204-12), it is inapposite to the present proceeding.
Where this Appeal Board should look, instead, to resolve the monopoly power issue in this particular market is in the area of wholesale power purchases to determine whether Applicants do indeed have a measure of control over the i
ability of municipal entities to engage in such purchasing trans-actions.
We think not.
Despite some dictum suggesting other-i wise in ALA3-452 (see slip op. at 259-60 n.477; but see id. at 256), the statistical dominance of these Applicants simply does not give them pcwer to control the prices at which wholesale power may be purchased by non-Applicant entities (or anyone else). --22/
Nor,-in view of FERC's well recognized authority to order 22/
~~
Applicants do not believe that the proper inquiry is whether FERC regulation produces rates identical to what might exist in a hypothetical, highly competitive market, for even in such situa-tions, market participants retnin some measure of control over prices charged.
Rather, the appropriate inquiry is whether rate regulation is sufficient te divest Applicants of enough independent control over prices to negate a finding of monopoly power.
Compare S-207 'Hughes) 8 (12-14) ; Hughes. 3719(11-14).
In this regard, the rate regulator might be viewed as the equiva..ent of a competing firm in an unregulated industry, and the issue is whether the existence of that competing firm is sufficient to deny the entity under scrutiny the ability to centrel price.
With respect to wholesale power, we think it unquescionable that the existence of (continued next page) i l
,m 23/
interconnect 1ons, can it be said that Applicants here are able to exclude municipal systems from the wholesale market by refusing to sell wholesale power to them (see App. Opening Br..
at 96-97).
In this connection, it is not without significance that there are no isolated systems in northern Ohio and western Pennsylvania.
And see n.26, infra.
This still leaves the question whether Applicants can be said to have monopoly power because allegedly they can refuse to transmit other sources of wholesale power to the municipal systems (compare ALA3-452, slip op. at 257-58).
The answer to this inquiry must also be "no".
In the first place, the evidence 22/ (cont'd)
EfRC rate regulation is at least sufficient to demonstrate that Applicants do not have significant control over price.
In addition, we believe the Consumers Appeal Scard's reference to the testimony of Dr. Wein suggesting that rate regulation con-firms the existence of monopoly power (ALA3-452, slip op, at 255),
unfortunately perpetuates a serious misconception.
The point is that rate regulation currently exists in the relevant wholesale power market in northern Ohio and western Pennsylvania and has for some time.
Thus, these institutional restraints on electric power rates are very much a part of the given " situation", and their very existence prevents Applicants from controlling prices.
In these terms, the fact of FERC regulation over wholesale rates confirms the nonexistence of monopoly power in this market setting, not its existence.
--23/See App. Opening Br. at 78-79.
The fact that the Appeal Board in Consumers may have found FERC authority with respect to the whole range of coordination services less than complete (see ALAB-452, slip op at 230-38, 257-59), is no reason to discount FERC's authority with respect to the entirely separate wholesale j
power transaction when assessing Applicants ' alleged monopoly power 1
in the wholesale market.
It is well to remember that northern Ohio and western Pennsylvania municipalities do not, and cannot, participate in the coordination services market; thus, FERC's authority over-the coordination transactions in that market (or, for that matter, the lack thereof) is of no real import in connec-tion with the relevant antitrust concerns here.
l
. in this proceeding shows that it would be feasible for a muni-cipal system such as the Cleveland system to obtain alternative scurces of wholesale power (if any existed) without use of Applicants' transmission by constructing its own transmission facilities (compare App. Opening Br. at 97 n.lis, 171-72 & n.204 with ALAB-452, slip op. at 78, 170, 215).
Second, and perhaps even more significant, is the fact that the record below demon-strates that there are not now, have not in the past been, and will not in the foreseeable future be, any alternative wholesale power sources available to the municipal systems in northern Ohio and western Pennsylvania (see App. Opening 3r. at 67-71, 173-76),
so as to maka the " wheeling" issue of realistic concern in the present context.
If there is no wholesale power to be transmitted, the highly theoretical prospect of a possible refusal to undertake such transmission is too slender a reed on which to rest a finding 24/
of monopoly power.-~
And, third, this is particularly so where, as here, the transmission policies of the Applicants, as evidenced, for example, by Toledo Edison's and Ohio Edison's transmission of Buckeye power (see App. Opening Br. at 202 n.232, 232), demon-strate that if alternative sources of wholesale pcwer existed, a
--24/The absence of alternative sources of wholesale power, like any other market structure element, is properly considered as part of the threshold evaluation of an entity's power to centrol prices or exclude competition.
The inquiry at this initial stage is properly focused only on whether an Applicant, in and of itself, actually possesses monopoly power.
We do not believe an affirmative response to that question is permitted simply because one can con-clude that the Applicann.under scrutiny may theoretically be able to refuse to transmit power that does not in fact exist.
- Indeed, the logic of such an argument would require the absurd finding that a local supermarket, for example, has monopoly pcwer, not-withstanding the existence of ten other supermarkets actively (continued next page)
i 29 -
method for transmitting that power could be arranged.m'5/
Taken together, these three considerations make it absolutely clear that the Applicants in this proceeding do not have the power to exclude the existing municipal systems from access to wholesale power, notwithstanding the different conclusion reached on other facts in Consumers and Otter Tail.26/
24/ (cont'd) cE' peting in the same area.
Obviously, the local supermarket m
theoretically has the ability to set prices, but it is precluded frem actually doing so by the ten neighboring supermarkets as much as the abovesaid Applicant is precluded from actually refus-ing to transmit wholesale power from outside power sources be-cause none exists.
Thus, when the theoretical possibilities are placed in the realities of the market setting involved, a finding of monopoly power is precluded in each case.
It need only be added in conclusion that the absence of alterna-tive sources of wholesale power would also eliminate any possibility of an exercise of monopoly power in the wholesale market, if, for entirely unrelated reasons, one were able to find -- contrary
- .o the situation here -- that the Applicant in question had an ability to control prices or exclude competition.
~~25/Sut for Duquesne and Penn Power, who have never been requested to wheel power and, therefore, have never had occasion to for=u-late a policy, the wheeling policy of each of the Applicants is established in the record.
See App. Opening Br. at 171-76 (CEI),
200-03 (TECO), 228-34 (CE) ; see also pp. 43-44 & n.38, infra.
--26/We would note that each of the three factors described in the text distinguishes this case from Otter Tail.
Moreover, unlike Otter Tail, where the Supreme Court condemned a utility's refusal both to sell wholesale power and to wheel wholesale power from outside suppliers, the Applicants here have willingly made whole-sale-power available to the municipal systems (see App. 3r. Oppos-ing Exceptions Filed by the City of Cleveland at 10-12).
- Thus, we do not have here the Otter Tail situation where an Applicant has set out to abuse the regulatory process by refusing to sell wholesale power (compare App. Reply 3r. at 53-54 & n.48).
In this regard, we would caution against a reading of some of the language used in ALA3-452 to describe the monopoly power j
holding in Otter Tail in an overly expansive and incorrect manner.
In particular, we do not believe that Otter Tail can accurately be read to hold that a utility's " control over transmission and generation facilities" is in and of itself sufficient to establish (continued next page)
Nor is a finding of monopoly power any more warranted in the present context when we consider those entities not already in the wholesale market which potentially might seek to enter that market in the future by way of retail franchise competition as denominated in ALA3-452.
The points just made as to these Appli-cants' inability to control prices or exclude competition are equally applicable in this area, and effectively remove the pos-sibility of monopoly power over this potential competition.
There is one further observation to be made, however, in light of what we regard to be an error in reasoning contained in ALAS-452.
The Consumers Appeal Board concluded that the significant economic and legal barriers to market entry, which were said to exist in a
26/ (cont'd) monopoly power (compare ALAB-452, slip op. at 257).
If that were the case, virtually every investor-owned utility could be said, as a matter of law, to possess monopoly power.
Such a conclusion would fly in the face of judicial precedent in this area, which establishes as the applicable standard for measuring " monopoly power" not simply a showing of dominance in the marketplace, but rather a showing of power to control prices or exclude competi-tion (see App. Opening Br. at 83-88).
Thus, an essential ingre-dient in the " monopoly power" analysis is, especially in a highly regulated industry such as the electric utility industry, the extent to which the regulators in the marketplace have or have not imposed institutional restraints on a dominant firm's ability to control the pricing and marketing activities of other firms in the marketplace.
It is within this analytical framework that Otter Tail necessarily must be read.
What that decision teaches is that the existance of regulatory safeguards against a misuse of strategic dominance does not..necessarily end the " monopoly power" inquiry.
Where,.as in Otter Tail (but not here), there are indications of an abuse of the regulatory process by the dominant utility -
foFt to exclude other entities from thei.e., a flaunting of the regulator straints -- in an ef marketplace, a finding of " monopoly power" is warranted, and may well lead to the conclusion that the dominant firm is guilty of an attempt to monopolize, or, if the abuse has advanced far enough, of actual monopoli:ation (see App. Reply. Sr. at 53-54
& n.48; ccmpare ALA3-452, slip op, at 257 n.474).
To read Otter Tail in any other, more sweeping, manner is beyond the permissible bounds of the majority cpinion.
the lower peninsula of Michigan, reinforced, rather than attenu-ated, Consumers' market dominance, and, therefore,. confirmed the existence of monopoly power (see ALAS-452, slip op. at 248-49).
On much the same reasoning (see ALA3-452, slip op at 249-52),
that Appeal Board dismissed as inapposite Consumers' reference to those cases where market share analysis was found insufficient to establish monopoly power (compare App. Opening Br. at 85-88; App.
Reply Br. at 47-52).
However, such an approach fails to correlate properly the competitive market structure than was found to exist in Consumers with the analysis in ALAS-452 of the monopoly power question.
As a result, the reasoning there is suspect and should not be followed here.
Our view of this matter has already been alluded to.
In the typical market, where direct competition is postulated, a large firm which is alleged to possess monopoly power may well attempt to rebut a presumption associated with statistical market demi-nance by contending that significant potential competitors exist and are "so positioned on the edge of the market (as to] exer [t]
beneficial influence on competitive conditions in that market" (see App. Reply Br. at 36-37).
In such a situation, ALAB-452 correctly reports that high entry barriers reinforce the inference 1
of monopoly power, while low barriers serve to' rebut such an in-j ference (see slip op, at 248-49).
However, the Appeal Board in Consumers did not have as its reference point a direct competition market.
Rather, it considered the potential of municipalities displacing their existing retail distributor.
That is, of course, the nature of whatever franchise competition might also be said to exist in this proceeding.
e Under such a regime of potential competition, the fact that natural barriers to entry may be very high -- and as a consequence may naturally preclude such potenuial competition -- is at the very crux of the existing utility's inability to preclude such potential entry by refusing to provide wholesale power.
Just as in Enited States v. Marine Bancorporation, 413 U.S.
602 (1974),
where state regulatory restraints made the acquiring firm an un-likely potential entrant, and thus of minimal procompetitive in-fluence, so too here, if natural barriers to market entry are high, making it equally unlikely that a municipality will dis-place its existing electric distributor, that circumstance is not in any sense an indicator of the existing distributor's monopoly power, but rather serves to underscore the artificiality of attaching any significance to potential franchise ccmpetition 27/
in this market setting.--
Indeed, high natural barriers to entry in this context realistically go a long way toward negating (not 27/
Indeed, any notion that potential franchise competition is at all possible in the service areas of Duquesne or Penn Power is belied by the corporation law of Pennsylvania.
As of 1968, the Pennsylvania legislature repealed those provisions which granted municipalities the authority to franchise public utilities (see Act. No. 216, SS 1204 (c) & (d), approved July 20, 1968), and re-placed it with a provision authorizing public utilities "to enter upon and occupy streets, highways, waters and other public ways and places" necessary to produce and distribute electric power, so long as the utility complies with the reasonable, nondiscrim-inatory police regulations governing maintenance, etc., of the facilities (see id. S 322E, codified at 15 P.S.
S 1322E).
- Thus, there simply is no franchise that a Pennsylvania municipality can refuse to renew if in seeks to displace the existing electric supplier.
Moreover, even if a municipality possessed such auther-ity, it still would have to demonstrate to the Pa PUC the inade-quacy of the present supplier's service before the certificate of public convenience and necessity required to acquire the existing distribution facilities could be issued (see 66 P.S.
S 1122 (e) ).
reinforcing) the existence of monopoly pcwer in the same sense as heretofore explained with reference to the regulatory con-trols over pricing and marketing functions at the wholesale 28/
level.
Compare ALAB-452, slip op. at 251 n.465.
For all these reasons we believe the facts of this proceed-ing establish that none of the Applicant companies possesses monopoly power in the wholesale market.
Compare A-190 (pace) 29-30, 32.
Such a conclusion necessarily pretermits any need to evaluate Applicants' activities under Section 2 of the Sherman 29/
Act.
Nevertheless, because some of the charges claim inconsistency with Section 1 of the Sherman Act, and also in order to demonstrate that even had Applicants been found to possess monopoly power no finding of monopoli:ation would have been warranted, we briefly re-view Applicants' conduct in light of ALA3-452.
28/
For similar reasons, the holdings in United States v. General
~
Dynamics Corp., 415 U.S.
486 (1974), and in Unt:ed States v.
Citizens & Southern National Bank, 422 U.S.
86 (1975), are rele-vant in determining whether Applicants possess monopoly power.
Each case holds that, despite high market share figures, elimina-tion of an entity by way of merger would not substantially lessen competition because other market factors discounted the competi-tive significance of that elimination.
Applicants understand these cases to support the position they have advanced that a theoretical ability on the part of Applicants to foreclose their replacement as the sole supplier of retail power in various municipalities does not establish monopoly power, if natural market forces make it unlikely that such potential replacement would ever occur in the absence of any activities by Applicants.
Compare ALAS-452, slip op at 250 n.464.
--29/It should be clear that, unlike the argument advanced by Consumers -- which ALAB-452 viewed as "an attempt to slip in via the back door a proposition the courts have barred a: the front" (slip op at 237) -- Applicants'. position on monopoly power is not on "end-run" around otter Tail.
The evidence in this pro-ceeding-establishes as a matter of fact that no Applicant company (continued next page) i C.
APPLICATION OF THE ALA3-452 REASONA3LINESS PRINCIPLES TO THE CONDUCT OF THE. APPLICANT COMPANIES In briefly taking yet another look at the specific conduct challen7ed in this proceeding, it is well to reemphasize three observations which are especially germane to the antitrust analysis 4
being undertaken by this Appeal Board.
First, it bears repeating that the fact here that the non-Applicant entities possess no ap-preciable self-generation, and therefore are not appropriate coordination partners, obviously pervades every aspect of Appli-cants' dealings with the municipal systems -- which are in reality wholesale power customers of one or another of the Appli-cants.
Second, the fact remains, notwithstanding the erroneous reference in ALAB-452 to otter Tail as suggesting otherwise (see slip op. at 282), that all the Section 2 " refusal to deal" cases mentioned in Consumers, including Otter Tail, rely on the dis-continuance of a previously provided service as the fundamental 29/ (cont'd) i Eas the power to control prices _or exclude competition.
One facet of this factual conclusion is, of course, the existence of FERC regulation without any showing of an attempted abuse thereof.
But equally important is the lack of appreciable self-generation in the relevant area, the economic realities of the electric utility industry (which both justify the horizontal and vertical integra-i tion of Applicants and raise substantial barriers to new entry in this natural monopoly industry), the legal restraints to competi-tion imposed by Ohio and Pennsylvania, and the other factors discussed in more detail in our earlier Briefs.
The. record developed here, and the arguments advanced by these Applicants, do not con-stitute an all-purpose legal a:gument which finds every dominant utility without monopoly power, or urges blanket i== unity frem the l
antitrust laws.
Rather, what is presented is a carefully tailored factual argument, that must be addressed on its own merts..
More-cver, Applicants' success on the " monopoly power" issue is not intended to suggest that antitrust review must consequently ecme to an end,_since this Appeal Board obviously still must resolve the separate Section 1 charges made against these ccmpanies.
I 1
I
__ 30/
-~
basis for finding the requisite intent to monopolize.
That is the present state of the antitrust law to be applied by this Appeal Board.
Third, the apparent view in ALAS-452 that the
---30/Despite its lack of clarity in other areas, Mr. Justice Douglas' opinion in otter Tail could not be more direct in stating that the defendant's conduct had been for the purpose of attempting "to pre-vent communities in which its retail distribution franchise had ex-pired from replacing it with a municipal distribution system" (410 U.S. at 368; see also id. at 370-71).
While the specific products being provided -- i.e.7 retail electric power versus wholesale power -- may have been different, otter Tail still represents a situation where a supplier previously dealing with a customer re-fuses at a later date to continue dealing.
This discontinuance is essential because in most instances it provides the necessary evi-dence to establish the requisite intent.
This analysis is cogently set out in A. Neale, The Antitrust Laws of the United States of America (2d ed. 1970).
It is therein stated tid. at 132-33; emphasis added):
It is clear that in condemning these.one-man boycotts (i.e., refusals to deal] the courts must have particular regard to intent and purpose.
It would be another faulty use of the analogy between restrictive agreenents and the behaviour of single powerful firms to argue that, because a boycott agreement is illegal per se, therefore any refusal by a dominant firm to trade must also be 11-legal per se.
In this fomn the analogy once again sup-There may be presses the vital element of intent.
many sound business reasons for such a firm to change its supplier of some material or to drop an account among its dealers.
It would be an obviously impossible position if a dominant firm were put under an cbligation to deal with all who wished to trade with it.
The courts have recognized this in practice, and it is when normal business reasons cannot plausibly be offered as an ex-planation for refusing to deal and when, on the contrary, there is evidence of a purpose to suppress smaller rivals, as in the cases quoted above, that the indi-vidual refusal to deal becomes actionable as a mis-use of monopoly power.
Nevertheless, the powerful firm undoubtedly has to exercise the greatest cau-tion, as the law stands, about cutting off a dealer cr taking its business away from an established sup-ol'ier; this is particularly the case when the firm has integrated backwards or forwards and has its own distributing or supplying subsidiaries, for in
-such a case it is only too easy for the refusal to deal to appear, rightly or wrongly, as a purposive exclusion of competition with the subsidiary ecm-panies.
_ conduct of a natural monopolist is to be evaluated under the same strict standard applied to monopolists in a more typical, freely competitive market (see slip op, at 283-86 & n.510), ig-31/
-~
nores judicial precedent to the contrary.
We would, once again, caution this Appeal Board against such an undiscerning application here of general antitrust principles formulated to meet different competitive situations in wholly dissimilar mar-ket environments.
With these introductory remarks, we turn to a more par-ticularized examination of certain of the challenged conduct.
1.
Nuclear access.
Unlike the situation found tc exist in ALAS-452 (see slip op, at 389-402), there is not even a
--31/Were the conduct of a naturni monopolist viewed no differently from that of a monopolist in a freely competitive market,
~here t
would be little point in inquiring into whether the monopoly is the result of natural market forces.
This reasoning has not been lost on the courts.
In Ovitron Corp. v. General Motors Corp.,
supra, 295 F.
Supp. at 378, it was stated:
"Where a natural monop-oly exists, somewhat more latitude is allowed.
The natural monop-olist is entitled to compete vigorously and f airly in c struggle for a market which cannot support more than one supplier."
See also Union Leader Corp. v. Newspapers of New England, 284 F.2d 582, 4
584 (1st Cir. 1960).
In fact, tne Union Leader court raises, but does not answer, the interesting question "wnether the antitrust laws were intended to protect one natural monopolist against another, in view of the f act that there was no competiton before the battle began and there would be none afterwards" (id. at 584 n.4).Whichever way one is inclined to respond to that question, there should be no dispute about one point.
Precisely because of the differing' conclusions that a court will attach to market dcminance when, on one hand, that dominance is achieved in a natural monopoly market where bigness is anticipated, and, on the other hand, that dominance is achieved in a more typical market where bigness is not anticipated (and therefore inherently suspect) (see App.
Opening 3r. at 98-100; App. Reply Sr. at 48, 57-61), a more discerning analysis is plainly required for evaluating the conduct of an alleged natural monopolist like the Applicants here --
one which takes full cognizance of, and attaches full weight to, the technical, economic and institutional factors that exist in the marketplace that is under scrutiny.
n
37 -
claim in this proceeding that any Applicant either " refused to consider", or declined to allow, small systems access to the Davis-Besse or Perry nuclear facilities being licensed here.
In-deed, the uncontested evidence is that only Cleveland and Paines-ville ever requested access to a nuclear plant, and in each in-stance CEI offered to make such access available (see App. Open-ing Br. at 145-50, 180-82).
The Licensing Board found CEI's offer to be "an outrageous affront to the policies underlying the anti-trust laws."
We have.ssviously noted our disagreement with that assessment and pointed out the errors implicit in such a conclu-sion (see App. Opening Br. at 150-54).
Nothing stated in ALAB-452 leads us to believe our remarks in this regard require any modi-fication.
We would simply add that each of the Applicents has stated 32/
on the record the details of its nuclear access policy.--
De-spite a Licensing Board finding that this policy, too, was in-consistent with the ntitrust laws, an objective assessment of the terms of nuclear access offered by Applicants demc-strates 32/
It hardly needs to be added that Applicants' nuclear access policy could not in any sense be dismissed out-of-hand as a
" post-hearing" policy like Consumers' changed wheeling policy was in ALAB-452 (see slip op. at 314-19).
In the first instance, there is nothing in the record which even faintly indicates that the policy set down in A-44 constitutes any " change" from prior policy.
In point of fact, because no request for nuclear access..was ever
~
received until af ter the ccmmencement of the Davis-Besse 1 proceed-ing, Applicants could not, as a practical matter, have formulated a formal policy prior to the time A-44 was developed.
Second, since Applicants have repeatedly stipulated that A-44 could be attached to their licenses notwithsttading the outccme of these proceed-ings, there is no doubt that the commitments contained in A-44 constitute the "pemmanent" policy of che companies.
Finally,
A-44 does not, on its fac.), contain anticcmpetitive provisions --
unlike the finding in ALA3-452 with respect to Consumers' wheeling policy.
that all of the non-Applicant systems will receive thereunder whatever benefits Applicants themselves may derive frcm construc-tion and operation of the nuclear plants (see App. Opening Br. at 129-34; App. Reply Br. at 20-24).
A policy of nuclear access on such terms suggests no antitrust inconsistency.
2.
Pool participation.
The evidence of record in this proceeding shows that the requests of Cleveland and Pitcairn to join the CAPCO Pool as full members were rejected for valid techni-cal and business reasons, entirely consistent with both Sections 1 and 2 of the Sherman Act (see App. Opening Br. at 106-13; App. Reply Br. at 10-12).
In contrast, the decision in ALA3-452 found on dif-ferent facts that Consumers had unreasonably excluded small systems from the Michigan Pool (see slip op at 402-12).
The Appeal Board's reference in that case to the unreasonableness of Consumers' action correctly measures the company's conduct in this area under a rule of reason standard, rather than condemning it out od hand as per se unlawful.
The rule of reason standard is no less appropriate here for purposes of assessing the pool membership issue (compare App. Opening Br. at 35-40; App. Reply Br. at 61-67); the per se analysis employed by the Licensing Board below must be rejected.
3.
Reserve sharing.
Unlike the circumstances presented in ALAB-452 (see lip op. at 358-89), no Applicant in this proceed-ing has ever refused to enter into a coordination arrangement with a small system contemplating that reserves would be shared on an
" equalized percentage basis".
In those two instances where a non-Applicant has sought to coordinate its operations with an Applican i.e., Cleveland and Painesville -- CEI agreed to share reserves and did not even require the small system to maintain any minimum reserve obligation (see S-203; S-204; App. Opening 3r. at 170, 179).
Nevertheless, because the CAPCO arrangements include an agreement amonc the Applicant companies to maintain reserves on the basis of the "P/N formula", the clai:n has been advanced in this proceeding that such an agreement among the Applicants is inconsistent with the antitrust laws.
A review of the technical reasons advanced by Applicants to justify the P/N formula as reason-able (see App. Opening Br. at 113-20), in light of the standards enunciated it. ALA3-452, confirms our original position that reserve sharing on such a basis is reasonable bcth in purpose and effect.--33/
4.
Coordination.
In ALA3-452, the Appeal Board found that in three specific instances Consumers unjustifiably refused to enter into operational coordination agreements with Northern Michigan, Wolverine Electric and Edison Sault (see slip op, at 330-39).
While the Licensing Board below also found several in-stances of refusals to coordinate by these Applicants, those findings are not well based, as we have earlier pointed out.
After carefully reviewing the Appeal Board's discussion in Con-33/
-~
The test of reasonableness adopted in ALAS-452 is that each interconnected utility should bear its proportionate share of the responsibility of interconnected operation (slip op. at 376).
The P/N formula does precisely this by assigning capacity re-sponsibility so that "ecch party's contribution to the reserves of the CAPCO group is directly proportional to its potential use of said reserves" (S-184, S 4.2).
Unlike the evidence in the Consumers proceeding, calculations under the P/N fornula do not pena 11:e the last system to join a large interconnected network (see slip op, at 377-78 & n.651), because the P/N ratio.is. cal-culated for.each individual mamher of the pool under the hypo-thesis that each system is operatinc in isolation (see I.D.
at 212).
Thus, while tne CAPCO pool calculates tne. total generating needs of all members on a one-system basis, allocation of that generating capacity is on the assumption that no pool exists.
Thus, a later joining member suffers no penalty whatsoever vis-a-vis existing-pool participants.
40 -
sumers regarding this matter, it is clear to us that the facts there were significantly different from the facts here.
As might be expected in light of the strikingly different market structures involved in the two proceedings (see pp. 4-19, supra), we can find nothing in Consumers which provides support for a finding here of unreasonable refusals by any of the Applicants to engage in opera-tional coordination with non-Applicant entities.
Thus, in the case of CEI, the facts show that CEI did enter into comprehensive coordination agreements with both Painesville and Cleveland (S-203; S-204 ; A-271), and that those agreements are fully consistent with applicable antitrust principles (see App.
34/
Opening 3r. at 140-41, 170-71, 179-80; App. Reply 3r. at 82).
As for Toledo Edison, the only claim of a refusal to coordinate is contained in the Licensing Board's misguided finding that the ccm-pany refused to consider joint ownership of large scale generating facilities with Napoleon and other unnamed municipal systems.
The facts of record are so clearly to the contrary as to make it abundantly clear that, at best, only a piecemeal review of the evidence was undertaken below (see App. Opening Br. at 209-11; 34/
In contrast to Consumers, where the Appeal Board found that the applicant there did not challenge the underlying facts but rather sought to justify its coordination dealings (see ALAB-452, slip op, at 321, 340), CEI challenges the factual finding that it refused to coordinate.
There is no genuine dispute among the parties as to the whole range of. coordinating services (including emergency, short-term, limited-term and firm power, ecenemy interchange, and coordinated maintenance) that CEI has made avail-l able.
Instead the opposing parties and the Licensing Board claim i
that CEI delayed in reaching those agreements and that certain operating problems are due to the conducu of CII.
We have previcusly set out the details of these factual disputes (see App. Opening Br. at 154-71, 176-80), and we once again urge the Appeal Board to review carefully the record for itself to determine the validity of our position.
- App. Reply 3r. at 85-86 & n.68).
The charge against Ohio Edison is equally difficult to com-prehend.
The record shows that Ohio Edison accepted the only proposal ever advanced by its wholesale customers; i.e.,
the R.W.
Beck recommended "prepajaent of pcwer purchases" plan, and at the close of the record was still awaiting a response from WCOE, which has yet to reach a consensus among its own members to go forward with the proposed plan (see App. Opening Br. at 217-23; App. Reply 3r. at 89-90).
We cannot help but note ence again that, despite the legal conclusion of the Licensing Board that Ohio Edison's conduct should be measured by whether the company refused "to engage in transactions which would otherwise be economically beneficial * * *" (compare ALA3-452, slip op, at 324), there is absolutely no evidence of any such refusal by Chio Edison. Finally, the alleged refusal by Duquesne Light to " coordinate" its opera-tions with Pitcairn involves discussions that in reality do not even embrace the " coordination" concept.
Instead, the referenced l
conduct amounts to nothi g more than a 10-year-old pricing dispute that has long since been settled to the mutual satisfaction of all concerned parties (see App. Opening Br. at 269-71; App. Reply 1
I Br. at 97-99).
l Thus, unlike the conclusion reached in different d 2 Tnces in ALAB-452, there is no basis on this record for faultin
.y of s
these Applicants as a result of their coordination practices.
While it may not be of critical importance to the antitrust in-quiry in.this case in view of the foregoing responses by each of the Applicants to what have been referred to as " coordination" requests, we would further note in passing our misgivings with the
42 -
Consumers Appeal Board's conclusion that " reciprocity" is not a prerequisite to a utility receiving a benefit in a coordinating arrangement (see ALAB-45 2,. slip op. at 32 8-2 9 & n. 5 8 5 ).
- Indeed, the single underpinning for that conclusion -- the example of an economy interchange transaucion -- points in exactly the opposite direction.35/
Moreover, even if that example were apposite, it would provide no basis for discounting " reciprocity" as a neces-sary element for the other coordinating transactions (see App.
Opening Br. at 102-05; App. Reply Br. at 69-76).
5.
Wheeline.
In ALAB-452, the Appeal Board made three essential findings with respect to Consumers' wheeling policy:
(a) that Const ars wheels electric power for its neighbor-ing large utilities (s'.ip op. at 299); (b) that Consumers' conduct amo inted to a general refusal to wheel power for the small systems (slip op, at 299-14) ; and (c) that Consumers' post-hearing change of its wheeling policy was still inconsistent with the antitrust laws (slip op. at 314-19).
Not one of these findings can properly be made in this proceeding.
i
--35/The analysis of the economy interchange transaction by the Consumers Appeal Board was ibnited to an evaluation of the short-tern incremental energy costs.
No consideration was given to the maintenance costs and increased wecr-and-tear associated with operating otherwise idle generation.
If energy always flows in one direction, there is no guarantee that thesa expenses will be recouped under a compensation clause based on a " split-of-the savings".
Moreover, when a supplying utility enters into an economy interchange arrangement, it must adequately assure itself of the reliability of the receiving utility's system, notwith-standing the supplying entity's right to " retract service on an instant's notice."
This is because in an interconnected network, the supplying utility will not, as a practical matter, he able to
" retract" service if the receiving entity cannot itself supply its own needs.
Thus, " reciprocity" is an essential element of an economy interchange transaction both in terms of pcwer costs and system reliability.
f We previously have explained the difference between Appli-cants transmission construction program, pursuant to which elec-tric energy ficws to the various load centers of. each Applicanu's system, on the one hand, and a wheeling arrangement, on the other hand (see App. Opening 3r. at 121-24).
The opinion in Consumers indicates that none of the parties so much as suggested that there existed in that proceeding such a distinction between Con-sumers' existing transmission arrangements with other entities and the wheeling arrangements it was requested, but apparently refused, to enter into.
Here, by contrast, the difference is a substan ive one, which depends upon the contractual relationship between the parties to the transmission arrangement.
Even though the physical flow of energy may well be the same, a " wheeling" transaction is clearly distinguishable from other transmission arrangements on the basis of the contractual terms and conditions35/
that define that particular arrangement (c[. slip op. at 136-37).
The cont 2.ctual differences in transmission arrangements that have been shown (without contradiction) to exist in this case are particularly relevant to the present antitrust inquiry since the record here discloses no instance where these Applicants (either alone or with others) have ever refused to consider a joint trans-36/
It is thus no more appropriate to attach the " wheeling" label to a transaction which, by its contractual terms, calls for a purchase and simultaneous resale of power over jointly constructed transmission facilities, then it is to attach, for example, a " leasing" label to a transaction that, by its contractual terms, calls for a. purchase of a condeminium (notwithstanding the fact that from all physical appearances, the transactions are indistinguishable).
.. mission construction program with any small system.21/
In addition, it has been affirmatively established that no Applicant has a general policy against transmitting electric energy for small 3
systems.-8/
Both Toledo Edison and Ohio Edison already transmit power for electric coc;eratives pursuant to the Buckeye arrangement (see App. Opening Br. at 202 n.232, 232).
In addition, both of these companies (App. Opening Br. at 200-08, 228-34) have offered to transmit electric energy for municipal systems; in each instance the municipal entities have failed to pursue the matter.39/ With respect to CEI, its transmission policy is also a clear matter of record (see App. Opening Br. at 171-76).
Furtherscre, each Appli-cant has committed itself to transmit power, when and as necessary, in connection with its offer of access to nuclear power (see A-44 ;
--37/In this regard, Applicants attach special importance to Cleve-land's attempt to avoid its pro rata share of respsonsibility for the CAPCO transmission construction program when it sought to participate in the CAPCO Pool (see D-185, p.
7 of proposal).
--38/Neither Duquesne Light nor Penn Power has ever been requested by a small system in their service area to transmit power.
More-over, at no time throughout this proceeding have the transmission oractices of these two utilities been challenged or any suggestion been made that either of then has a general policy against trans-mitting electric energy for small systems (see n.25, supra).
2/
~
9 The record shows that, with respect to the pcwer to be trans-mitted, both Toledo Edison and Ohio Edison have scught to know the source of the power, the duration of the transaction, the backup arrangements, and other factors necessary for the pricing of tne transmission arrangement.
While such specificity may have been viewed as unnecessarv in ALAB-452 where Censumers was round to have announced a ceneral refusal.to wheel power in absolute terns, the insistance on'such. essential information as a condition to en-tering into a " wheeling arrangement" provides no legininate basis for antitrasu condemnation here where there has been no such sug-gestion of a recalcitrant attitude 'against wheeling under any and all conditiens.
Indeed, for the proposed transactions to go beyond mere talk, such specificity is absolutely essential
.- App. Opening Br. at 133-34; App. Reply Br. at 22-23 n.20).iO/
D.
APPLICATION OF THE ALA3-452 RELIEF PRINCIPLES TO THIS PRCCEEDDIG Although dealt with but briefly, the Consumers Appeal Board's instructions with respect to appropriate relief properly delineate the outer reaches of the Commission's remedial authority (compare ALAB-452, slip op. at 431-32 with App. Opening Br. at 124-37, 294-97 and App. Reply Br. at 13-24).
Even assuming arcuendo that each and every one of the Licensing Board's findings deserved to be upheld on this appeal -- which we dispute -- application of the Consumers' relief instructions in the instant market setting would require at most the license conditions specified in A-44.
Of course, in view of Applicants' stipulation to the attachment of those conditions to the Davis-Besse and Perry permits and licenses in any event, such relief could be ordered by the Appeal Board in this proceeding even without making any adverse findings under Section 105c.
Respectfully submitted, SHAW, PITTMAN, POTTS & TROWBRIDGE A SL M W
Of. Counsel:
Wm. Bracforc Reynolcs
\\
Robert E.
Zahler SQUIRE, SANDERS & DEMPSEY FULLER, HENRY, HODGE & SNYDER Counsel for Applicants REED SMITH SFAW & McCLAY WINTEROP, STIMSON, PUTNAM &
ROBERTS Dated: March 13, 1978 40/While the present page limitat'a~is preclude a detailed review of the remaining areas where these Applicants have been accused of conduct inconsistent with the antitrust laws, we do not find the Appeal Board's decision in ALAB-452, analyzing facts which
~ differ in a number of material respects from the facts of record here, to underrdne in any way cum earlier discussiens of these matters.
APPENDIX A The following table indicates the almost negligible changes in average number of customers, megawatt-hour sales, and revenue between CEI and Cleveland.
For each cTtegory, the table shows the change between 1966 and 1975 in CEI's percent of the total retail market (i.e., residential, commercial and industrial) and CEI's percent of just the residential retail market:
Total Residential Average Customers
+2.5%
+1.4%
MWH Sales
+0.7%
-0.4%
Revenue
+0.7%
-0.6%
Source:
A-132, pp.
2-3.
I i
f APPENDIX 3 ACQUISITIONS Applicant rystem Date Peak Load (mw)
CEI None Toledo Edison Waterville-a/
Liberty Center-b/
8-26-68 1.60 7-3-74
.89 Norwalk_gg-c/
Lowelvil 12-28-65 1.13 Chio Edison
/
10-31-72 14.40 Hiram e/
1-31-73 1.70 East Palestine 5/
4-7-75 5.20 Penn Power None Duquesne Aspinwall S/
6-29-67 1.60 Totals 26.52 Average 3.79 Median 1.60 d
a/
S-158, at TE-37
-b/ S-158, at TE-14; D-139a.
c/
S-158, at OP/PP-36; A-216; A-217; A-219.
d/
Id.; A-221; A-222; A-223.
-e/
_Id.; A-219; A-220.
-f/ S-158 at OE/PP-15; there is no evidence in the record on the East Palestine acquisition since the charges with respect to East Palestine were dismissed by the Licensing Board prior to the start of the Ohio Edison direct case (see App. Opening Br. at 224).
5l S-158, at DL-28; see also A-120; A-262; A-263.