ML19331A127
| ML19331A127 | |
| Person / Time | |
|---|---|
| Site: | Midland |
| Issue date: | 10/08/1974 |
| From: | Baker D, Grossman M, Saunders J JUSTICE, DEPT. OF, JUSTICE, DEPT. OF, ATTORNEY GENERAL, OFFICE OF |
| To: | |
| References | |
| NUDOCS 8006110508 | |
| Download: ML19331A127 (283) | |
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. DONALD I. BAKERc ..- r.
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- j. TABLE OF CONTENTS
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Page I. Summary of this brief -------------------------------------- --- 1 II. The hearing ------ -------------------------------------------- 11 III. Statement of facts --------------------------------------- --- 14 A. Market structure --------------------------------------- --- 14
- 1. Applicant ---------------------------------------- --- 14
- a. Physical plant ------------------------------ --- 14
- 1. Generation --------------------------------- 14
- 11. Transmission system -------------------- --- 15 iii. Distribution plant ----------------------- 15
- b. Use of Midland power ----------------------------- 16
- c. Power exchange transactions ----------------- --- 17
- d. The Michigan Pool agreeeent ---------------------- 17
- e. Financial d imens ions of Applican t ---------------- 20
- f. Applicant's geographic markets ------------------ 21
- 1. Applicant's retail geographic market -------- 21
- 11. Applicant's wholesale firm poter geo-graphic market ---------------------------- 21 iii. Applicant's power exchange geographic market ----------------------------------- 22
- 2. Smaller systems in Applicant's crea and major utilities on Applicant's boundaries ------------------ 22'
- a. Small systems ------------------------------------ 22 I
- b. Major systems ------------------------------------ 25 l
B. Sum =ary explanation of power pooling cnd definition of terms 26
- 1. Reserve sharing --------------------------------------- 28 l
- 2. Coordinated development ------------------------------ 31 l 3. Joint transmission arrangements (" wheeling") ---------- ,
33
- 4. Preemptive coordination ------------------------------ 34 T
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Page a C. Nature and extent of competition in the sale of power ----- 36
- 1. Bulk supply of wholesale firm ' power ------------------- 36
- a. The self-generation purchase power alternative --
36
- b. Self-generation by existing entities which have some access to power exchange in corpetition with purchases of bulk power from Applicant ----- 43
- c. Potential competition from new municipal entrants to supply the bulk power needed for their own retail distribution system by self-generation --- 44
- d. Competition from two or more alternative whole-salers of bulk power ---------------------------- 44
- 2. Retail power
- a. Competition, actual and potential for large blocks at a single time -------------------------------- 48
- b. "One customer-at-a- time" compe titien ------------- 50
- i. Between Applicant and rural cooperatives for existing customern or new loads ------------
50
- 11. Betueen Applicant and municipals in Bay City, Traverse City, Zeeland and I,ansing; in fringes of other cities where Applicant has facilities; uithin other cities where Applicant has limited franchises ----------- 55 iii. Between private corporation electric utilities --------------------------------- 57
- 3. Power exchange services ------------------------------
59 IV. Issues of law ------------------------------------------------- 60 V. Argument ------------------------------------------------------- 61 A. Applicant is maintaining a situntion inconsistent with the antitrust laws ------------------------,,------------------ 61
- 1. The product and geographic markets defined by the Department are in accord with established leg..1 principles ------------------------------------------- 61
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- a. The product markets ----------------------------- 62
- b. The geographic markets -------------------------- 71
- 2. There is substantial evidence of Applicant's intent to monopolize the uholesale firm power and retail firm power markets ---------------------------------------- 87 11
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s s . x 3. Applicant has the power to grant or deny smaller systems in its area access to the regional power exchange ---------------------------------------------- 97
- a. Physical and economic power ---------------------- 98
- b. There are no effective regulatory restraints upon Applicant's power to deny access to power exchange services ----------------------------------------- 123
- c. Economic effect of state and other federal regulation of the wholesale firm power and retail firm power markets ------------------------------- 126~
- d. Congress by enacting Section 105c., has eliminated the need for the Board to decide whether federal and state regulation fully replace competition --- 131
- c. Applicant's monopoly power is strengthened by its major neighbors' refusal to offer ebolesale power in Applicant's geographic carket whether or not such refusals result from conspiracies to allocate markets ------------------------------------------- 134
- 4. Appliaant has exercised its monopoly pecer by refusing
- s. small systccs access to the regional porer exchange market ------------------------------------------------ 144
- a. The denials have been outright or by denial of reasonable terns ---------------------------------- 144
- b. Applicant refused to share reservec on reasonable terms which in turn chilled specific requests for ccordinated development until the 1970 Atomic j Ene rgy A c t ame ndmen t s ----------------------------- 147 l
- c. The effect of Applicant's preemptive coordination - 160 l
- d. Efforts to preclude small system participation in the Michigan Pool -------------------------------- 160
- c. Chilling small system requests [or more sophis-ticated forms of coordination -------------------- 164 l 5. The inability of Applicant's competitiersin the Lcwer Pcninsula to obtain access to regional powec exchange l services seriously impairs their long-term competitive l position - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 168
- a. Consequenece of not owning nuclear generation ----
169
- b. The risks of relying t. on a competitor for bulk power supply ------------------------------------- 173 iii
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- 6. The statutory test: situation inconsistent with the antitrust laws -------------------------------------- 183
- a. The standard of "inconsistcacy" is a distinct and lesser standard than " violation"
----------- 183
- b. The evidence establishes a violation of the antitrust laws and a fortiori the existence of a situation inconsistent with the antitrust laws 185
- 1. Monopoly power ---------------------------- 186
- 11. Intent to monopolice --------------------- 188 iii. Exercise and maintenance of the power ---
190
- c. The actual and potential competition in Michigan's Lower Peninsula on which the Department has focused is exactly the kind of competition intended to be protected by Section 105c. ---------------------
207
- 7. The licensed activitics will caintain the situation inconsistent with the antitrust laws ----------------- 218
- a. The licensed activities ------------------------ 213 r- b. The nexus: the licensed activities maintain the situation -------------------------------------- 225 B. Applicant's asserted defenses have no = erit -------------- 228
- 1. There are no immunitics from AEC antitrust juris-diction or conflicts with other federal or state jurisdiction ---------------------------------------- 228
- a. No other federal law prevents the Atomic Energy ,
Cc= mission from imposing the requested conditions 228
- b. There is little possibility of a conflict between AEC and FPC jurisdiction ----------------------- 230
- 2. Applicant may not negate federal tax and financing
! policies as to municipal and rural cooperative systems by the exercise of private monopoly pcwcr ----------- 238 .
- a. Alleged tax and financing advantages cre irrelevant 238
- b. Relevant antitrust decisions -------------------- 245 VI. Relief requested by Department of Justice --------------------- '
251 A. Proposed license criditions ------------------------------- 251 I B. The requested relief is " appropriate" within the meaning of Section 105c.(6) -------------------------------------- 253 iv
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Y C. The ~ issue of co=pelled retail t: heeling -------------------- 256' "VII. Proposed findings of fact and conclusions of law ------------- 258 4 i Conclusion --------------------------------------------------------- 268 4 a k i l-. I e d-s I t
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p s CITATIONS CASES Pare Alabama Electric Coop., Inc. v. Alabama Power Company, 38 FPC 962 -------------------------- 175 Alabama Power Company - Farley Units 1 & 2, AEC Dkt Nos. 50-348A and 50-364A, Board Order
November 1, 1973 -----------------------------
95 American Federation of Tobacco Grovers v. Neal, 183 F.2d 869 (4th Cir.) ---------------------- 245, 246 American Tobacco Co. v. United States, 328 U.S. 781 ------------------------------------------- 101, 187 Anza Electric Cooperative v. FPC, No. 73-2255 -- 181 Associated Press v. United St'ates, 326 U.S. 1 -- 120, 204, 205 207, 265 Brown Shoe Co. v. United States, 370 U.S. 294 --
. 71 ' California Motor Transport Co. v. Trucking Unlimited, 404 U.S. 508 ---------------------- 95 Carnation Co. v. Pacific Westbound Conference, 383 U.S. 213 ---------------------------------
237 Cities of Statesville v. AEC, 441 F.2d 962 ------ 54, 215 City of Detroit v. Detroit United Ry. ,172 Mich.136,137 N.W. 643 aff'd 229 U.S. 39 ----
, 42 City of Parie. Ky. v. K.U., 70 PUR 3d 45 -------- 233 Commonwealth Edison Co., Dkt No. E-7587, Opinion 681 (January 7, 1974) -------------------- ,--- 181 Connecticut Light and Power (FPC Opinion No. 701, Dkt. No. E-8105, July 22, 1974) ------------- , 236 Conway Corp, et al. v. FPC, No. 73-2207; Cities o f Batavia, et al. v. FPC, No. 74-1411; City of -
Anaheim et al. v. FPC, No. 73-2173 ----------- 181 Crenshan v. Great Central Insurcnce Co., 482 F.2d 1225 (8th Cir.) ------------------------ - 51 l vi
Pagu Duke Power Company, FPC Dkt No. E-7557,18 (February 2, 1972) ----------------------------------------- 182 Duke Power Company, Oconee Units 1, 2 cnd 3, AEC Dkt Nos. 50-269A, 50-270A and 50-287A --------------- 182 Eastern r'ilroad Presidents' Conference v. Noerr Motor F ight Inc., 365 U.S. 127 ---------------- 94, 95, 242 Eastman Kodak Co. v. Southern Photo Materials Co., 273 U.S. 359 ------------------------------------ 197, 209 Electric Cities of North Carolina, et al. v. FPC, 182(D.C. Cir.) Nos. 73-1185, 73-1237 -------------- 182 Federal Maritime Commission v. Svenska Amerika Linien, 390 U.S. 238 ----------------------------- '231 Florida Power & Light Co., Dkt No. E-8008, Orders of November 21, 1973 and January 7, 1974 -------- 181 F.P.C. v. Idaho Power Co., 344 U.S. 17 ------------ 233 F.T.C. v. Cement Institute, 333 U.S. 683 ----------- 101 (~~ F.T.C. v. Procter & Camble Co., 386 U.S. 568 ------- - 211 ( ' Gainesville Utilities Department et al. v. Floride Power Corp., 402 U.S. 515 ------------------------ 117, 152, 155 193, 195, 209 235, 251 Gamcq Inc. v. Providence Fruit & Produce, 194 F.2d 484 (1st Cir.) , cert. denied 344 U.S. 817 -------- 119., 204 Georgia v. Pennsylvania RR Co., 324 U.S. 439 ------- 230 Gulf States Utilities Co. v. Kauper (Civ. Action No. 71-102) Antitrust & Trade Reg. Rep. No. 583, p. A-11, October 10, 1972) ------------------------- 95, 231 Huron Portland Cement Co. v. Public Service Commission, 351 Mich 255, 88 N.U. 2d 492 --------------------- 52 In the Matter of Adopting Rules Governing the Extension of Singic Phase Electrical Service, U 2291 (MSPC, March 24, 1966) ------------------- 50 Independent Taxicab Operators Ass'n v. Yellow Cab - Co., 278 F. Supp . 9 7 9 07. D. Calif. ) -------------- 101 5 Keogh v. Chicago & Northwest R.R., 260 U.S. 156 --- 230 vii
l f Page ( Lorain Journal Co. v. United States, 342 U.S. 198, 199, 209 142 ---------------------------------------- Louisiana Power & Light Co. - Waterford Unit No. 3, AEC Dkt. No. 50-382A, Bd. Order April ------ 96, 225 19, 1974, Bd Order September 28, 1973 Michigan Gas & Electric Co. v. -----------------City of Dowagiac, 42 273 Mich 153, 262 N.W. 762 Morris Run Coal Co. v. Barclay Coal Co., 68 PA. 193 ST. 173, 186 ------------------------------- Nationc1 Screen Service Corp. v. The Poster ----- 119 Exchange Inc., 305 F.2d 647 (5th Cir.) New England Electric System, S.E.C. Administra-tive Proceeding Ho. 3-1698, 38-3911-(July 7, 169 1972) -------------------------------------- Northern Natural Gas Co. v. FPC, 399 F.2d 953 228, 230, 231 g (D.C.Cir.)-------------------------------- . m. Northern Pacific Railroad v. United States, 183, 184 356 U.S. 1 --------------------------------- Northern Securiticc Co. v. United States, 193 193 U.S. 197 --------------------------------
- v. United States, 410 Otter T' ail - wer Co.---------------------------- 95, 147, 187, 199 U.S. 366 (1973) 205, 229, 231, 233 247, 255, 260 265 Pacific Gas & Electric Co., Dkt No. E-7777 181 (March 14, 1974) ---------------------------
Packaged Programs Inc. v. Westinghouse Broad- 201, 202, 264 casting , 2 55 F. 2d 708 (3rd Cir. ) ------------ Pan American World Airways v. United States, 237 371 U.S. 296 ------------------------------- Public Service Co. of Oklahoma, Dkt. No. E-8242 - 181 (Feb ruary 2 8 , 19 7 4) - - - - - - - - - - - - - - - - - - - - - - - -
; 235 Public Service Company of Oklahoma, 25 FPC 656 238 k_.- Reilly v. Pinkus, 338 U.S. 269 --------------- -
St. Michaels Utilities Commission, et al., 175 35 FPC 591 -------------- ------------------- viii~
Page g-Silver v. New York Stock Exchange, 373 U.S. 341 ------------------------------- 70, 204, 228, 231 Six Twenty Nine Productions v. Rollins Telecasting Inc., 365 F.2d 478 (5th Cir.) -- 202, 264 South Carolina Generating Co., 16 FPC 52 Aff'd rub nom South Caroline Generating Co. v. FPC, 249 F.2d 755 (4th Cir.); cert. denied, 356 U.S. 912 ----------------------- 236 Southern California Edison Co. , Dkt No. E-8176, Order of Sept. 21, 1973 ------------ 181 Southwest Public Service Company, 33 FPC 343 175 State of Wisconsin v. FPC, 201 F.2d 183 (D.C. Cir.) cert denied, 345 U.S. 934 ------------ 51 Thill Securities Corp. v. New York Stock Exchange , 433 F. 2d 264 (7th Cir. ) ----------- 231, 237 Tobacco Growers v. Neal,183 F.2d 869 (4th Cir.) 120
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f^- Union Electric Co., Dkt. No. E-8215, Opinion of .. January 7, 1964) --------------------------- 181 United Mine Workers v. Pennington, 381 U.S. 651 94, 95, 101, 242 United States v. Aluminium Co. of America, 148 F. 2d 416 (2d Cir.) -------------------- 101, 188, 189 i i l l i l %.- ix l t
i x Page United States v. E.I. duPont de Nemours & Co. , 351 U.S. 317----------------------------------------- 62, 101, 258 United States v. Falstaff Brewing Corp., 410 U.S. 526----------------------------------------- 211 United States v. Florida Power Corporation and Tampa Electric Company (1971 CCH Trade Cases, S 7 3 , 6 3 7 (M . D . F l a . ) - - - - - - - - -- - - - - - - - - - - - - - - - - - - - - - - 48 United States v. Griffith, 334 U.S. 100---------------- 188, 209 United States v. Grinnell Corp., 384 U.S.563----------- 61, 62, 72 101, 186 United States v. Otter Tail Power Co., 3 31 F . S up p . 5 4 (D . Minn . ) - -- ------ --- -- --- - -- -- --- -- L/ United States v. Paramount Pictures, 334 U.S. 131----------------------------------------- 17G
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United States v. Penn-Olin Chemical Co., 378 U.S. 321----------------------------------------- 211 United States v. Philadalphia National Bank, 374 U.S. 321----------------------------------------- 71, 228, 253 United States v. Phillips Petroleum Company, 367 F. 2d Supp. 1226 (C.D. Cal.) aff'd 207, 209 42 U.S.C.W. 3710-------------------------------------210, 211, 250 United States v. Tern.inal P.ailroad Association, 224 U.S. 333-----------------------------------------194, 203, 265 r l United States v. United Shoe Machinery, 110 l F. 2d 295 (D. Mass.) aff'd per curam 347 U.S. 521---------------------------------------------101, 187, 195 l ! Utah Pie Co. v. Continental Eahing Co., ^~ i l 386 U.S. 685----------------------------------------- 247 Utilities Commission of Neu Smyrna Beach v. FPC, No. 74137--------------------------------------- 181 l Uisconsin Electric Co., FPC No. E-8619----------------- 181 r I l ss X i
STATUTES {- Pa[:e Atomic Energy Act of 1954, 42 U.S.C. 2011 et seq.-------- ,166, 228 Seccion 105c., Atomic Energy Act of 1954, 42 U.S.C.' 2 13 5 ( c ) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - , 11, 253 Section 4(e), Federal Pouer Act, 16 U.S.C. 797(e)-------- 233 Section 10(h) , Federal Power Act ,16 U.S .C. 803 (h)------- 47 Section 203, Federal Pouer Act, 16 U.S.C. 824b----------- 234, 235 Section 103, Internal Revenue Code, 26 U.S.C. 103-------- 242 Michigan Constitution Art. VII 21, 24, 29 (1963)--------- 42, 55, 56 Sections 8.71, 5.2079 Mich . S tat . Ann . - - - - -- - - -- ----- - - - - 42 Pub. Acts Michigan, Nos. 15 7 , 174 (19 74) ----------------- 56 Pub. Acts Michigan, No. 6 9 (19 2 9 ) - - - - - - - - - - - - - -- - - - - - - - - - 57 f- Sections 3 and 5, Rural Electrification Act, 7 U.S .C. 901, 905 (b), as amended by P.L. 93-32------- -- 242 Section 2, Sherman Act,15 ".S.C. 2----------------------- 61, 185 MISCELLANEOUS Rule 803(18), Federal Rules of Evidence, 56 F.R.D.184 , at 302, 317-------------------------------------------- '- 2 3 8 Hearings before the Joint Cc=mittee on Atomic Energy on S. 3323 and H.R. 8862 (83rd Cong. , 2d Sess.)-------- 212, 213 Hearings before the Joint Comaittee on Atcaic Energv ' on Pouer Development and Private Enterprise (83rd Cong., 1st Sess.)---------------------.---------- 212 Hearings before the Joint Committee on Atomic Energy on S . 25 64 (90 th Cong . , 2d S es s . ) ---------------------- 216, 236 Hearings before the Joint Committee on Atomic Energy on Prelicensing Antitrust Review of Huclear Power Plants ;91st Cong., 2d Sess.)-------------------------- 236 i ' xi
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Page Hearing before the Senate Antitrust and Monopoly Stibcommittee on S. Res. 57 (85th Cong. ,1st Sess.)-- 243 Hearings before the Senate Finance Committee on S . 1795 (85th Cong . , 1st S es s . )------------------ 243 Legal Advisory Report of the Federal Power Commission, 19 54 Na tional P ower Survey-------------------------- 236, 249, 250 REA Bulletin 20-6, United States Department of Agriculture, May 7, 1969---------------------------- 37, 176 S. Rep. No. 91-1247 (91st Cong.,-2d Sess.)------------ 183, 253 Survey of Federal and Electric Utility Procurements of Pcuer Equipment, Report to the -Subcommittee on Eudgeting, Management, and Expenditures, Committee . on Government Operations, United States Senate (B-174311)----------------------------------- 129 Lecislative Document No.102, State of New York 124 (" \ (1935)---------------------------------------------- - 203
. The Antitrust Lcus of the U.S . , Neale-----------------
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,_ _ _ j I. SUSMARY OF THIS BRIEF Applicant (Consumers Power Company or C.P.Co.), a
$3 billion electric and gas ut_lity whose $1 billion of electric facilities blanket cost o' Michigan's lower peninsula (except the metropolitan Detroit area and the rural " thumb" areaT */
proposes to install the Midland nuclear generating units. When they coce on line in 1980, these units will add approximately 1300 tw of low-cost base-load electrical energy to Applicant's grid supply of bulk firm power, thereby lowering its average - generating cost. To the extent the Applicant is able to 'r reduce its average cost while preventing its cc=petitors from doing so, it improves its competitive position. Thus, the operation of the Midland units will clearly maintain and, in all probability, exacerbate Applicant's dominance and con-trol of the generation, transcission, and distribution of electrical energy in its area. Applicant has exercised this dominance and control to bring about a " situation inconsistent with the antitrust laws"; and issuance of the proposed license,
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unless appropriately conditioned, would caintain it. Definition of Product and Geozrachic Markets
~ The antitrust analysis in this case starts with the defini-tion cf the relevant product and geographic carkets where com-petition has been affected. There are th ee relevant product u
*/ D.J. Nos. 1,18,19, 21, and 204 all contain caps showing various aspects of the market areas.
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markets for electric power: (1) retail firm power distribu-tion; (2) wholesale firm power (including firm bulk power supely to the distribution properties of a vertically integrated sys-tem such as C.P.Co.); and (3) the regional power exchange market, wherein bulk power producers buy and sell the various coordinat-ing services which are reauired in order to make use of large-scale generating units and in order to assure that bulk power supply has the reauired degree of " firmness." The relevant geographic markets for retail firm power and wholesale firm power are roughly coextensive in area and encompass generally the portion of Michigan's lower peninsula over which Applicant's transmission grid extends. Applicant would define a set of sepa-rate geographic markets, based on what it regards as varying barriers to entry. Since the key barriers are the result of Appli-cant's otm anticompetitive conduct and can be corrected in this proceeding, we regard this attempt to fragment the geographic maricetasunwarranted. Because of the nature of the electric power industry it is virtually impossible to place precise bound-aries on the regional power exchange geographic market. However, l the Department has relied on a showing that Applicant can and has excluded its competitors in the relevant wholesale firm power i
- market (which it has precisely definedi from the geographically l broader power exchange market.
Electric Systems in Applicant's Area i
" Within the relevant geographic market there are approxi-mately two dozen independent municipal electric systems, ten distribution cooperatives, two generation and transmission
k r (G & T) cooperatives, and two private corporation utilities, one of which is Applicant. */ Except for the City of Lansing munic!. pal system, which is approximately ten percent '.f Applicant's s!ze, the largest inde-pendent electric system located in Applicant's area is approxi-mately one percent of Kpplicant's_ size, and many systems __ are much smaller. Major Neighboring Electric Systems are Not Sources of Supply in Applicant's Market Major systems on Applicant's eastern and southern boundaries could provide sources of low-cost power to small systems near the eastern and southern boundaries of the market area; but,either because of territorial agreements between Applicant and these major systems or unilateral decisions not to compete, Applicant has rarely offered to sell wholesale power outside its market area and its major neighbors have refrained from selling at wholesale in Consumers Power Company's aref.((Mor'eovAr, absent transmission or " wheeling" services by Applicant, transactions in bulk power supply between Applicant's major neighbors and small systems in the interior of the market area would be impractical. Wholesale Competition Actual wholesale competition in Applicant's area arises l principally from the option that small systems have of installing self-generation as an alternative to purchasing power from
- */ Another, Edison Sault Electric Company, is located in the iipper peninsula and receives a portion of its supply from C.P.Co. via underwater cable under the Straits of Mackinac.
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( . Applicant. Applicant regularly solicits the approximately two dozen independent retailers--municipal electric power utilities, one private electric power company, and one distribution coopera-tive--to purchase their wholesale firm power recuirements from C.P.Co. rather than to construct, operate or expand their own bulk power supply facilities. Similar competition occurs between Applicant and two generation and transmission (G & T) cooperatives in the western and northern areas of the relevant geogr .phic market. Potential competition of the same sort results from (1) the potential of entry by additional independent entities into dis-
,- tribution of electric power,in an area where Applicant now serves at retail, and their vertical integration into bulk firm power supply; (2) the potential of Applicant accuiring distribution systems which are vertically integrated into generation; and (3) the potential of Applicant purchasing other bulk supply sys-tems such as the two G & T cooperatives. If access to " wheeling" services 'over Applicant's trensmission network were available to Applicant's wholesale customers, this would make feasible their purchase of wholesale power from competitive sources and i
would increase the likelihood of entry by independent generat-16g retailers. . Retail Competition In the relevant geographic market, actual competition s- exists between Applicant an d distribution cooperatives for large "three-phase" retail loads one-at-a-time; within and near Traverse City and Bay City there is vigorous competition 4 __
_. a s' i for all loads, and on the fringes of other cities there is competition between Applicant and municipal electric utilities principally for new loads one-et-a-time. Further, there is potential competition at retail for customers in blocks-at-a-time between Applicant and a municipality if the economic barriers to entry created by Applicant's dcminance can be surmounted. Such municipal entry is viewed by Applicant as a serious competitive threat. Lansina esined a major block of customers in its North School District when Applicant determined it would be the loser in one-at-a-time competition and sold its facilities to Lr.nsing. r Applicant's Access to and Need for Power Exchance Services Applicant's growth and consolidations over the years have made it, in the period under study (1960 to presentT, a l power exchange in and of itself. Further, it has engaged in comprehensive pooling arrangements with Detroit E6ison (the ! Michigan Pool); and through the Michigan Pool has engaged in other pooline arrangements with Ontario Hydro and the other MIIO (Michigan, Indiana, Illinois, Ohio) systems. These interconnections and pooling contract arrangements in the regional power exchange market enable Applicant to employ large-scale nuclear units and still sell firm pm:er with'out a costly increase in its reserves. Absent such arrangements, Applicant's use of nuclear units would be impractical. 5 s L
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(- . Need of Small Systems for Power Exchance Services Access to the regional power exchange is even more essential to the small systems in Applicant's area, for with-out such access these systems cannot achieve economies of scale by installation of large generating units. Moreover, since nuclear units are not commercially available in sizes less than 500 mw, Applicant's denial of access to the power exchange is in effect an absolute prohibition on these systems owning or operating a nuclear facility. Existence and Use of Annlicant's Market Power f- In the relevant geographic market, Applicant is the only actual supplier of power exchange services in amounts suffi-cient to support the installation of a 500 mw nuclear unit; and its transmission system is the sole electrical path between the small systems in its area and the regional power exchange. This monopoly of the regional power supply market enables Applicant to dominate and control both wholesale and retail competition. Despite state and Federal regulation of the wholesale firm and retail firm markets, Applicant retains substantial latitude for private decisions with respect to its activitids in these markets. Since regulation has not supplanted Applicant's independent business judgment, it is, therefore, appropriate to apply antitrust principles to measure Applicant'.x conduct. Beyond alh - rag ic to dominate the wholesale and retail power markets, Applicant's control of the regional power 6
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exchange permits it to foreclose its competitors from the I_$ access essential to power exchange services or to grant access only on unreasonable terms. It is uncontested that Appli-cant's size, achieved in part through accuisitions and con-solidations of formerly separate systems, and its strong interconnections and pooling contracts with neighboring major utilities, give it substantial bargaining power in dealing with small systems in its area, particularly since these systems have no alternative but to deal with Applicant. Applicant's bargaining position is further enhanced by its ( ( vertical *ntegration. The ~ " mutual benefit" demanded by Applict-t as a prerecuisite to granting access to the regional power exchange is nothing more than its insistence upon exacting the advantage of its monopoly position. Effects of Applicant's Exercise
. of Its Mononoly Power The restrictions imposed by existing contracts between l Applicant and stall systems coupled with Applicant's refusals to enter contracts containing reasonable terms for power exchange services clearly demonstrate Applicant's unreasonable exercise of its monopoly power. Since January 1, 1950, Applicant has accuired several independent electric systems, and others have entirely abandoned their bulk power supply t
function. During the same period no entity has either entered
- s-l the retail distribution business or accuired a bulk power supply function. These changes in market structure, anticipated by
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I - s Applicant, result in its presently controlling over 80% of the wholesale firm and retail firm power markets. Further, the market structure grants Applicant the power to control access to the regional power exchange and thus Applicant can prevent its actual or potential competitors from installing economical large-scale generation, particularly nuclear generating units. Applicant's Intent While not necessary to support a demonstration of monopolization, Applicant's specific intent to monopolize -
,r"' - has been established by abundant evidence, including (1) evi-dence of its intent to perfect its monopoly by accuiring all remaining electric systems in its market area and many systems in Michigan's upper peninsula; (2) evidence of Applicant's proposed purchase of street lighting systems with the antici-pated effect of eliminating potential municipal competitors; (3) evidence of Applicant's concern over and attempts to prevent its competitors from securing independent sources of bulk power supply; and (4) Applica.nt's concern over and l
l attempts to block a small scale but alternative power pool i l in its area. l Assumed Tax and Financing Advantages are Irrelevant j. Even if it were established that tax and financing advan-l tages have enabled municipal and rural cooperatives to survive l and prosper despite lack of access to large-scale generating l 1
\, l units, and that these advantages coupled with access to the power exchange market would result in a " bad" allocation of resources, */ continuance of the existing situation would not be justified. Congress, which created these " advantages," also enacted the antitrust laws, as~well_as.Section 105, and. in so do!ng established no exception based'on Federally
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granted tax or financing benefits. Thus, these tax and financ-ing benefits, even if they confer an advantage vis-a-vis Applicant, are irrelevant. - Appropriate License Conditions Section 105 c. requires the Atomic Energy Commission, if ( it finds the existence of a situation inconsistent with the L antitrust laws, to condition Applicant's operation of the Midland nuclear units in such a manner (s to eff_ectively elimi-nate that situation. Effective relief recuires the Commission to enter license conditions which compel Applicant to grant access to the regional power exchange on terms and conditions similar to those which exist where utilities of equal bargain-ing strength are dealing at arm's length. Such license con-ditions will complement rather than conflict with state and
*/ This proposition, we submit, cannot be establi< ' ed in any event. Economists can predict whether a part iar action will tend to increase or decrease usage, but val- judgments such as "too much," "too little," " good," " bad," etc., are typically political matters solely within the purview of Congress.
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4 - . , , = . .. _ . _ . - -- _i Federal ~ regulatory policy and further the Congressional intent behind Section 105. Absent access to power exchangs only a few large electric systems in the United States (and only Applicant in the relevant marketT could utilize nuclear units; and this =cnopolization of nuclear energy is what Congress desired to prevent by enacting Section 105. .f C t
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_ __ .m ,2__m_-. _ cz _ g, k. II.__THE HEARING This is the first proceeding tried under Section 105c..(5)
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of the Atomic Energy Act of 1954 after its 1970 amendment. */ The basic issue is whether the licensing of Applicant Consumers Power Company to construct two nuclear generating units totalling 1300 mu will " create or maintain a situation inconsistent with the antitrust laws." The proceeding was initiated by the Justice Department's advice letter of June 28, 1971. Preliminary motions and discovery extended from October 29, 1971, through November 12, 1973. Trial of
,_ the case lasted from November 27, 1973, to June 12, 1974.
( . The Department of Justice presented seventeen witnesses in its direct case, including three experts; an economist, Prof. Harold H. Wein of Michigan State University and former chief economist of the Federal Power Commission, who de-scribed the relevant markets; Mr. William Mayb.en, partner in R. W. Beck and Associates, consulting electrical engineers, who explained power pooling principles and assisted Dr. Hein in his market analysis; and Mr. Samuel Helfman, also an electrical engineer, who presented power supply cost studies. The Department also presented twelve witnesses associated
*/ 49. U.S.C. Section 2135c(5) , 68 Stat. 919, 84 Stat. 1473 Tbecember 19, 1970).
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with the operations or planning for a number of the smaller systems in Michigan's lower peninsula. * / _ Other witnesses for the Department of Justice in its direct case included Mr. Kenneth Croy of the Michigan Public Service Commission, who authenticated a map of the electric companies of the State of Michigan, and Mr. Wendell Kelley, president of the Illinois Power Company and member of the board of the National Association of Electric Compcnies, who testified regarding activities of NAEC in response to the testimony of Frank Martin before the U. S. Congress. On rebuttal the Department presented the study of 7 electrical engineer Mr. Jack Lundberg, associated with R. W. Beck and Associates, who prepared n so-called " probability" engineering study on reserve levels. The Department of , Justice offered 289 exhibits, many of which came from the files of Applicant.
*/ These included Mr. Arthur Steinbrecher, manager of
- Northern Michigan Electric Coop, a bulk power supplier; Mr.
l John Keen, manager of Wolverine Electric Coop, a bulk i I supplier; Mr. Roger Westenbroek, manager of a distribution cooperative; Mr. Joseph Wolfe, former mancger of the City of Traverse City municipal distribution system; Mr. Earl Brush, manager, City of Lansing municipal system; Mr. Robert Kline, Jr. , chief executive officer of the Edison Sault Electric Company; Mr. Steven Fletcher, president Alpena Power Company; Mr. Albert Hodge of Daverman Engineers,, consulting engineers for many of the smaller systems; Mr. Homer DeBoe of Campbell, DcBoe, Giese & Webber, the engineers for the City of Cold-water, Michigan; Mr. Ronald Rainson of the City of Holland, Michigan; Mr. Harold Munn, president and board member of l, Public Utilities Board of the Cit l\' Warren Sundstrand, attorney for tke of Coldwater Village of paw and Mr. Paw, l Michigan. \ 12
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A number of the smaller systems operating in Applicant's area intervened either directly or through the Michigan Municipal Association. The intervenors presented four witnesses, a substantial number of the cepositions of Appli-cant's employees, and additionally, documents almost entirely from Applicant's files. The Atomic Energy Commission staff presented one witness, Mr. Frederick Muller. Applicant presented seven witnesses in its direct case. */ _ The testimony of one of its witnesses, Mr. Gerber, was rejected by the Board. To replace Mr. Gerber's testimony, [' Applicant proffered testimony o f Mr. Slemmer, a consulting engineer, formerly with the Ebasco firm, and additional testimony of Dr. Pace, and as its rebuttal case, testimony of Mr. Stafford and Mr. David Lapinski. Applicant presented 93 exhibits, including statistical exhibits prepared by Dr. Pace and Mr. Paul; and through its manager of rates, Mr. Jefferson, Applicant presented all of its retail rate schedules (effective prior to its current schedules).
*/ Economists Dr. Stelzer and Dr. Pace; its president and chief executive, Mr. Aymond; its manager of rates, Mr.
Jefferson; Mr. Mosley, vice president of Consumers Power Company ConsumersinPower chargeCompany's of system staff planning; Mr.itsR.relations man on L. Paul [ hips with smaller area systems; and Mr. Abraham Gerber, an economist. 13
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III. STAT MENT OF FACTS A. MARKET STRUCTURE
- 1. Apnlicant.
Applicant, Consumers Power Company, (Applicant or C. P. Co.) is the larger (geographically) of the two major Michigan electric utilities that sell retail and wholesale firm power entirely within liichigan. Applicant has received franchises permitting it to serve a major portion of Michigan's lower
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peninsula' at retail and from a geogr~aphic standpoint ha's~ a - ( , larger. ~ wholesale and retail market area than,any'other Michigan.clectric utility. Applicant also serves as a major gas utility in Michigan, but the following discussion will be limited to its electric operations.
- a. Physical Plant.
In its electric business, Applicant is both a bulk supplier and retail distributor of electric power.
- i. Generation Its bulk power supply properties consist of 7 conventional steam generating plants totalling 2,942 mw, 2 nuclear plants totalling 771 mw, 7 gas turbine plants totalling 522 mw, 2 hydroelectric plants totalling 53.4 mw and 11 other minor hydroelectric plants, bringing the total hydro generating m
capacity to 133.6 mw. With the additional Ludington's 14
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pumped storage of 994.5 mw, the total generating capacity of C. P. Co. as of December 31, 1973, totals approximately 5,363 mw. */
- 11. Transmission system The Consumers Power Company generating stations are integrated into a bulk power supply system by high voltage and extra-high voltage (ehv) transmission lines which also serve to interconnect its bulk power supply system to its load (except for the City of Pontiac) and to its major 5
neighboring utilities , as shown in D.J . No. 1. **/ C. P. Co. operates apprcximately 1,422 circuit miles
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( of 345 kv, 3,339 circuit miles of 138 kv, 4,198 circuit miles of 46 kv, and a small amount of 120 kv, 41.6 kv, and 23 kv, totalling approximately 9,054 circuit miles of transmission which blankets its market area. See D.J. No. 1. iii. Distribution plant In addition, it has 43,970 pole miles of overhead distri-I bution, including approximately 3,059 cable miles of i
*/ Fee Department of Justice Exhibit 228(A), Uniform Statis-tical Report, Year Ended December 31, 1973, for the Consumers Power Company, page E-18. [ References to exhibits will utilize 1
I the notations D.J. No. 197, Int. No. 1032, or C.' No. 11,001 respectively for exhibits of the Department of rice, Inter-venors, or Applicant except in the case of exhi es incorporated in the record attached to prepared direct testimony where the reference will be the witness's prepared direct and identify] the specific page; e.g., Pace p. d. attach J.D. P 1, p. 1, of 2.
-- **/ Applicant has access to power exchange with Ontario Hydro through Detroit Edison's transmission system and provides the latter access to systems to the south (AEP, Toledo Edison, NIPSC, Commonuealth Edison, etc., through Applicant's trans-mission).
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w i underground distribution. j/ The major use of C. P. Co. 's i bulk power supply is as the source of supply for its own retail distribution properties. Applicant also sold approxi-mately 220 ma in 1973 to other smaller systems in its area for resale by them.f[/ Its peak summer load in 1973 was 4,394 mw.***/
- b. Use of Midland Power, Power from the two Midland units totalling 1300 mw will flow into the Applicant's trahsmission system and incr. ease the capacity of the system to supply system power.***vf(Stafford, direct, Tr. 9160; cross, Tr. 9166.
( (
*/ Uniform Statictical Report for the Year Ended December 31, T973 for the Consumers Power Company, page E-21. (D.J. No.
228(A) .)
**/ See Consumers Power Company Annual Report to the Federal Power Commission for the Year Ended December 31 1973 Form No.
. 1 page 412. [ Applicant's Exhibit No. 12,022, $um of, Average ! Mo,nthly Non-coincidental Monthly Peak Demands, Col. H.]
***/ See Uniform Statistical Report for the Year Ended December "31, 1973, for the Consumers Power Company, Page E-17. [D.J.
No. 228(A) . ] i ****/ Reference to testimony will utilize name of the witness ano the transcript pagination and an indication of uhether the testimony was on direct examination or cross-examination (i.e., Brush, cross, Tr. 2324; Mayben, direct, Tr. 2543). Unere
- written direct testimony has been incorporated in the tran-script, references will utilize pagination of the prepared direct tes timony (i.e. , Pace p.d. 31) . For the convenience 3 of the Board we list below the transcript references for the i
page preceeding the testimony of each uitness who sponsored
- prepared direct testimony:
i Dr. Harold Wein Tr. 3979 Mr. Abraham Gerber Stet i'.- _ Dr. Peter Gutman Tr. 4664 Tr. 88
- Mr.Janjai Chayavadhanangkur Tr. 5090 MrWilbur Slemmer Tr.88 Dr. Joe Pace Mr. Fred Muller Tr. 5545 Mr. Jack Lundberg Tr. 89;
. Dr. Irwin Stelzer 'Tr . 7224 Dr. Joe Pace Tr. 7239 1 16
a ...
- c. Pouer Exchance Transactions.
In addition, Applicant makes both sales and purchases or exchanges of various kinds of power and energy and other services collectively referred to here as power exchange services such as emergency power, econo =y energy, etc., to and from other major bulk power suppliers with which it is interconnected. (D.J. No. 197 shows in diagramatic form the various contracts between Applicant and others in the power exchange market for the purpose of coordinating their operations and its arrangements, principally with Detroit Edisor, for coordinating their development as the Michigan
- Pool. The underlying contracts (principally D.J. Nos. 67 to
- 78) include arrangements with Detroit Edison, Ontario Hydro, Indiana-Michigan (AEP), Toledo Edison, NIPSCO and Co==on-wealth Edison.) As P rofessor Uein explained in his testimony, Applicant's ability to buy and sell these services which he referred to as " factors of production" results in a reduction of the cost of power sold or supplied in the bulk firm power market. The technical features of these services are dis-cussed below.
- d. The Michinan Pool Acreement.
In 1962 Applicant and Detroit Edison formed the Michigan Pool * / by executing a comprehensive pooling agreement,
*/ Applicant. started pooling power with Detroit Edison in ss TV49 and had more limited interconnections with Detroit as long'ago as 1928 (D.J. No. 69, p. 1) .
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__ g Y( ( - introduced by the Department as D.J. No. 71. (D.J. No. 71 consists of the agreement, its amendments through 1972, and supplements including Supplement C dealing with shared generating units.) The Pool Agreement provided for the " sharing of reserves," with each system's reserve responsibility being established as an e'qualized percentage of its peak demand. A 1962 study by Applicant (D.J. No. 65, p. 2) of the then proposed pool showed that idaile Applicant alone would have required 247 reserves to support the proposed 350 mw units, pooling with Detroit Edison reduced the minimum required reserve ts 19%, pooling further with ontario reduced reserves still ( further to 15%, and anticipated interconnections south to the FRIO systems reduced reserves still further to 12.5% (considering the unit sizes and risk levels contemplated at the time) . A 1961 study estimated the savings aucributable to the Consumers Power Company-Detroit Edison ties, at the j levelized annual sum of $16.9 million (D.J. No. 70, p. 9) . I In addition to providing for reserve sharing, the Michigan Pool agreement provided for a program of " coordinated l development." D.J. No. 70 is an explanation of the agreement as presented by C.P. Co. to 'the FPC staff. It notes an obligation to share the capacity from so-called " pool units" although such
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_A 4 units are to be engineered, constructed and owned by only one party. _*/ Article VII provides for the ownership and operation of pool-associated transmission facilities other than inter-connections: It is recognized that certain facilities within one party's service area may provius a principal grid transmission function useful to both parties and this article provides that the ownership costs and operation costs thereof shall be shared equally. (D.J. No. 70, p. 6) The Agreement indicated the expectation of the parties that [Alttainment by the parties hereto of an expanded range of mutual benefits and advantages can be obtained by (a) rendering mutual assistance (' during emergencies; (b) effecting maximum practicable economy and dependability in day-to-day production of electric power requirements of each system [ economic dispatch or economy energy
*/ Supplement C-1 provided for installation of Campbell No. 2 by Applicant in March,1967, sized at 372 mw, the initial shares by C. P. Co. and Edison were, respectively, 216 and 156. Supplement C-2 provided for installation of Trenton Channel No. 9 by Edison in November,1957, sized at 515 mw and initial shares by C. P. Co. and Edison were, respectively 18 and 497. Supplement C-3 provided for installa-l tion of St. Clair Unit No. 7 by Edison in Mcy,1959, sized
! at 527 mw (winter rating) shared, respective 1.y, by Edison l and C. P. Co. 194 and 333. Suoplement C-4 provides for the installation by Applicant o f Palisades No. 1 in Febenary, 1970, sized at 700 mu (initially) and shared initially by Edison, 412 ma and C. P. Co. 288 mw. Supplement C-5 pro-videc for the installation of Monroe Unit no. 1 in May, i 1971, sized at 785 mw with the initial shar$nt by C. P. Co. l and Edison, respectively, in the amounts of 185 and 600. Supplement C-6, Part A, provides for the sharing of capacity and energy cost of pool Unit No. 6 (Monroe Unit No. 2) initially sharing of the 789 mw unit was 180 mu C. P. Co. , 609 mw Edison. 19 s
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(' transactions; i*/,] and (c) utilization to the maximum c:: tent or current and future opportuni-ties for securing increased economies through coordination of planning, design, construction, and pooled operation of the electric system of the parties consistent with the requirements associated with an increase in use of electric power in Michigan. 71; bracketed ma terial supplied. ] [D.J. No. In 1971, at the instance of the Department of Justice, Detroit Edison agreed to liberalize the previsions of the 1952 agreement concerning admission of third parties (Wolfe, direct, Tr. 1684-7). The 1962 agreement was cancelled and superseded by a May, 1973, agreement which, although liberal-icing provisions for admission of third parties, amended features of the agreement in ways which would tend to make them undesirable as far as small systems were concerned (Wolfe, direct, Tr. 1591, 1700-2).
- e. Financial Dimensions of Annlicant.
Exhibit 21(A) (Applicant's Annual Report to its share-holders for 1973) indicates its 1973 total operating revenues were $835 million, of which $495 million were electric revenues, an increase from $417 million in 1972 (p. 18). Its total 1973 assets were $2,844,847,574, of which almost one billion dollars represents electric plant. _*/ A "one system" control center was established for tee Michigan Pool at Ann Arbor (Int. No. 1005, pp. 5-5). Economic dispatch is performed by an on-line computer at the center 1005 15-16). For an explanation of economic (Inc. No. dispatch see:, pp.Westfield, Multi-Plant Firms, and Eusiness Practice: Marginal Analysis, An Example LXIX Cuarterly Journal of Economies 253 (May,1955) 20
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- f. Annlicant's Geocraohic Markets.
(1) Applicant's retail geographic =arket. The red or orange portions of D.J. No. 204 indicate the area in khich Applicant holds itself out to serve, ad to which it limits its supply of sholesale fir = power. This encompasses most of the area of the central and western portions of Michigan's le::er peninsula (except for (1) a s=all area in the southwest served by two AEp subsidiaries, (2) an area in the Northeast served at retail by Alpena Power Co=pany, a small privately-owned system having a s=all a= cunt of hydroelectric generation and purchasing the re-( =ainder of its power at wholesale from Applicant, and (3) in areas served by municipal distribution systems where Applicant has not been granted a franchise, e.g. , City of Lansing, Michigan). -- Applicant sold firm pouer to a total of 1,163,377 electric retail customers consisting of 1,04G,350 residential, 114,627 co=rercial, 7,631 industrial, and 769 public street ,I and highuay lighting customers. * / These customers are located in appro>:icately 150 cities and towns (Westenbroek, l direct, Tr. 930 and D.J. 109). (ii) Applicant's Wholesale fire power geographic
=arket.
In addition, it sells Wholesale firm power for resale i to 13 =unicipal systens (sc=e of which alsn have their own L
*/ Uniform Statistical Report for the Year Ended Dece=ber 31, f573, for the Consuners Power Company, page E-14 (D.J. No.
228(A)) . g
_ _u _ - r - =--
._=
R .c d (- s generation), one small private corporation electric utility, one cooperative distribution system and two cooperative generation and transmission systems (Pace p.d. attach J.D.P-2, pp. 1-2), and to the Edison Sault Electric system in the upper peninsula via a cable unear the Straits of Mackinac (Fletcher, direct, Tr. 4377) . (iii) Applicant's power exchange geographic market Its power exchange transactions are with systems covering a much broader arca as shown on D.J. No. 237, a map of the East Central Area Reliability group or ECAR systems. Using D.J. No. 237, Mr. Mayben described without particularizing p_ the area of power exchange in which Applicant participates, explaining why it can be described only generally.
- 2. Smaller Systems in Auplicant's Area and Major Utilities on Aeolicant's Boundaries.
- a. Small Systems.
Although applicant serves at retail in 150 communities 1 in the lower peninsula, the independent municipal systems and one private system serve altoget'ter a total of 24 communities (Pace p.d. attach J.D.P. 2, p.1) . Of the systems operating within the periphery of the area served by Applicant, by far the largest is that of the City of Lansing, Michigan, with a 1973 peak retail load of approxi-mately 372 ms. (Brush, direct, Tr. 2069-2070) The City of Lansing maintains its own source of bulk power supply from local generation. Three other major but very much smaller 22 i
~
generating municipals are the City of Traverse City, the City of Grand Haven (1% of Applicant's peak demand, Westenbroek, direct, Tr. 944), and the City of Holland (17. of Applicant's demand) (Westenbroek, direct, Tr. 944). Most municipals are much smaller (D.J. No. 109). For example,Lowell has a peak demand of approximately 0.1% (Westenbroek, direct, Tr. 944). Some cities such as the Cities of Bay City, Chelsea, Eaton Rapids, and Harbor Springs, and more recently, Petosky and Charlevoix, are entirely dependent on Applicant for power supply (Westenbroek, direct, Tr. 953-5). Others cre only partially dependent, either generating the balance on their own or purchasing it from others. These in-clude the City of Coldwater and the Alpena Power Company which have, respectively, fossil fuel (diesel) and hydro generation, and Southeastern Rural Electric Cooperative (Rogers, direct, Tr. 5555) which purchases some of its power used in Michigan from Detriot Edison and some from sources in Ohio in order to supply that part of its distribution systems which extends south of the Michigan border into Ohio. (Rogers, cross, 5584-85). In addition to the major systems adjacent to Applicant shown on D.J. No. 204 and D.J. No. 1, there are several systems also supplying electric power at wholesale, at retail, or both, wi. thin the periphery of the areas served by ~ 23
w: x - _ _ . . _ . _. .: __ , _ .- _ _ .___ ( Applicant's integrated system. */ _ The locations of the above-mentioned systems are shown in D.J. No. 18 and their general service area on D.J. No. 19. Of these, two are solely in the business of bulk power supply, Northern Michigan Electric Cooperative and Wolverine Power Company, which are so-called generation and trans-mission cooperatives. Northern Michigan supplies whole-sale firm power to its Presque Isle, Cherryland cnd Top O'Hichigan members, which are distribution cooperatives. Uc.lverine supplies firm bulk power to four member distribu-tion cooperatives, Western Michigan, Oceana, 0 & A, and Tri-r County. The generation and transmission systems of Northern Michigan, Wolverine, the City of Traverse City and the City of Grai. Haven cre interconnected and form a small power pool (Steinbrecher, direct, Tr. 1112-1113, 1117) . Associated with the pool are the City of Hart, City of Lovell, City of Zeeland, and the City of Porticnd, Michigan. They cre interconnected with a transmission system operating principally at 45 or 69 kv, shown in red on D.J. No. 18, but they propose to raise these voltages to 138 hv in the future as shoun in D.J. No. 20. (only a small portion j",/ This e::cludes a retail distribution system of Appliccnt's ( serving the City of Pontiac, Michigan. s_- 24
of the M-C interconnection is shown on D.J. No. I which lists only transmission of 115 kv and above.) The total genera-tion of all members of the group which have formed a very small scale power exchange among themselves called the Michigan Municipal and Cooperative Power Pool, or M-C Pool, was approximately 190 mw in 1971 (Steinbrecher, direct, Tr. 1285), plus something less than 10% additionc1 for the four small satellite municipals. This compares with 10,656 mw of generation for the Michigan Pool for the same year (Steinbrecher, direct, Tr.1290) and a fortiori a much larger amount for the interconnection of the Michigan Pool a6d the systems with <- which it is interconnected. The Michigan Pool generation capacity is some 55 times the capacity of the four members of the M-C Pool (Steinbrecher, direct, Tr. 3?90). There is house-to-house and street-to-street competition between Applicant and the municipal system in Traverse City and Bay City.
- b. Major Systems' The Detroit Edison system lies to the east of Applicant's system, serving at wholesale and at retail in the industrial nnd metropplitan areas in and around Detroit,and rural areas up into the " thumb" on Michigan's lower peninsula (D.J. No. 1 and D.J. No. 204). Detroit Edison is 1*trger in load and supply facilities than Applicant (D.J. No. 109), although, as shown by the man (D.J. No. 204), much smaller in area of service.
25
1 Two subsidiaries of the large American Electric Power (AEP) system, ,*/ Indiana-Michigan (I & M), and Michigan Power Company serve a small area of the Southeast corner of Michigan's lower peninsula. AEP acquired the Michigan Power properties from the former Michigan Gas & Electric system in the mid 1950s. The major portion of I & M's operations are conducted in Indiana as shown by D.J. No.1. Other major systems south of the state line include Toledo Edison, Northern Indiana Public Service, and Ohio Power, another subsidiary of AEP. These major systems could serve as - alternative sources of wholesale supply to small systems in Applicant's territory near its eastern of southern boundary. x If wheeling were available, service to loads further inside Applicant's market could be feasible. B.
SUMMARY
EXPiANATION OF POWER POOLING AND DEFINITION OF TERMS The Department presented Mr. William Mayben, a partner in the R. U. Beck firm, M/ to describe the purpose and mechanics of power-pooling. Small systems may obtain their power supply from generat-ing units at a sing'a generating station. Generaters are
*/ A multi-state. holding company system consisting princi-pally of Indiana-Michigan, Ohio Porer, Appalachian Power, and Kentucky Power.
$/ A coccercial consulting engineering firm having offices 2.n several states.
26
subject to mechanical failures in the order of 27. of the time. Thus, in order to sell electric power with a greater degree of continuity, reserves are necessary so that loads may be served with a high expectancy o f continuity of service referred to as " firm" service.. While the expectancy is not 100%, it is much greater than expectancy of . power supply continuity from a single generator. * / _ With very small systems, reserves equal to the single largest unit are required. To sell 10 mw of firm power, two 10 ntw units are required. Mr. Mayben testified that utilizing large units for a small system increases the amount of reserves required and thereby increases the cost of electric power service because ( of the fixed charges on the reserve equipment which is idle except during emergency periods. He explained that reserves can be reduced by using several smaller units, for example eleven 1 mw units in lieu of two 10 mw systems. Such a l system could lose its largest unit and still supply 10 mw to its " firm" customers. But he explained also the increas-ing economics of scale available in utilizing larger generat-ing units. (Mayben, direct, Tr. 2552-2556). System loads vary from hour to hour during the day, month, and year. " Peaking units" are used to supply loads
*/ Mr. Mayben explained the probability of the simultaneous Eut random outage of two generators would be .02 x .02 or
.004. (Mayben, direct, Tr. 2572).
'^
27
that occur a few hours a year. " Base load" units supply loads which occur a greater number of hours during the year. Mr. Mayben explained that peaking units have relatively lower capacity costs and higher energy costs than base load units. Base load units have relatively high capacity costs-- cost per kilowatt, but much lower energy costs--cost per kilowatt hour; both because they can use the lower cost fuels and because of their greater efficiency in converting these fuels into kilowatt hours of electricity (Mayben, direct, Tr. 2255, 2257). Mr. Mayben explained that system planning for an isolated system is a compromise betueen using larger units to obtain scale economies, principally in base load power, and using smaller units in order to reduce the capital costs of reserves. (Mayben, direct, Tr. 2554, 2555) .
- 1. Reserve Sharing.
High voltage transmission from 40 kv and up *;/ can be used to assist in utilizing larger unit sizes while keeping reserves to a reasonable level. Two or more electric systems can join into an interconnected system through high voltage transmission. They can then share their reserves and take the benefits by way of selling more firm power from existing units, using larger units, or increasing the reliability of '
*/ Witness Wolfe testified 138 kv transmission would be required for transaction of magnitude between Traverse City ~ and others. Mr. Helfman required a 345 loop of transmission for extensive coordination in his case studies.
28
k power supply. In practice the benefits are spread among all three.jt/ The elements of such a " reserve sharing" arrange-ment are an agreement betueen the two or more utilities as to the minimum amounts of reserves necessary to maintain adequate reliability on the combined systems and apportionment of these . reserve requirements among the participants. The contracts obligate each participant to supply " emergency power" on an if-and-when-available basis. To demonstrate the practical effect of reserve sharing, let us suppose two systems each having two 10 une units. Isolated, each could sell only 10 mu of " firm" poner or " assured capacigf," a total of 20 mu of
" firm" power or assured capacity from the total 40 mw of capacity. Follouing interconnection, they need keep only 10
('^ ~ mw in reserve; and if they share the savings equally, each uould need to keep only 5 mw in reserve, or 33 1/3% of the 15 mw of assured capacity each can sell as firm poucr (Mayben, direct, Tr. 2564-2670). Alternative ways of accomplishing the same goal uould include merging or consolidating the two utility bulk power systems into a single system, or making them sub-sidiaries in a holding company system. Mr. Mayben testified that system size has a major effect upon the bargaining position of entities secking to negotiate reserve sharing arrangements. For a small system which has ji_/ Wolfe, direct, Tr. 1635-6 29
no alternative entities available to deal with, the value or benefit of the reserve sharing arrangement is much greater than to the larger one. Mr. Mayben has represented small systems bargaining for power exchanga with large ones, and represented large systems in negotiations with smaller ones. Where the systems have equal bargaining strength, the bargain is usually struck on the basis of equal percentage reserves :
* * ~*
Q. Let's assume that there's a small utility and it has the alternative of connecting to 20 other equal-sized utilities on Gainestiille terms. Would it gain a benefit? 1 A. Yes. Q. Would there be any value to it, if they were close by? A. Yes, there would be substanti.a1 value, comparing connecting to that group of utilities versus not connecting and meeting the same level of reliability of power supply c:n, say, a largest unit out reserve criteria. Q. Now let's assume that the uti11ty, the small utility, while still interconnec.ted with the 20 independent utilities on Gainesville terms, now seeks interconnection and c oordination on Gainesville terms with a larger utility. What benefit does it get from. that, or could .you contrast that benefit with the. earlier benefit? A. Well, if he is already interc onnected with 29 other utilities, which I believe you said was the same size as the single 1arge utility, effectively he has achieved r.;ost of the y 30 g s
, _ - . _ _ . . _,_ -- .5- - - -
s benefits, virtually all of the benefits that can be achieved through coordination, at least from the point of view of equaliced reserves. So if he then elects, after he has already coordinated uith 20 utilities, to coordinate with one more large utility, the benefits-- the increment of additional benefits is quite small. Q. Nou, sir, let's remove the 20 independent utilities from the area. They no longer exist; they've gone out of business. There are only two utilities left, one small one and one that s 20 times as large. ' Will the inter:onnection of the one small one with the one large one produce bene-fits to both the small and the large? . A. They can, yes. Q. Now, will they be equal benefits? A. No. I think the benefits to the small
'~ uill be substantially greater than the benefits
( to the large. Q. Uhat will be the value of the benefits to each of these utilities? A. Well, the value of the benefits to the sma11' utility can be expressed in, again, the savings in reserve requirements and that can be translated into annual cost of capacity, and it can ba sicable. Again, he may go from 100 percent reserve requirement to a 20 percent reserve require =ent, and that does represent a sicable benefit to that municipal, compared to not having coordination. (idayben, direct, Tr.. 3743-3745) 26/
- 2. Coordinated Develocment.
Mr. Mayben also explained the purpose of and methods for
" coordinated development," uhich can also lead to 'use of
*/ The same general hypotheticci was put to Mr. Lundberg TEundberg, direct, Tr. 9135, 9137) . Dr. Pace (Sle==er-Pace, cross, Tr. 8555, 89671 uitness for Applicant, also agrees that citernatives available to the smaller system would affect the price reached by bargaining betueen the large and small systems. ,
W1
i
***~ +1 larger scale base-load units. Load' growth is substantial in i the electric industry, on national average approximately 77, per year. Of concern for the system planner is the absolute amount of growth. For a 4000 mw load system,107. growth would mean 400 cm of growth in a year. Under those circum-stances, installation of an 800 mu unit for an isolated system would leave idle 400 na of capacity for one year; for a 2000 mu system with 200 mu of annual load growth, installing an 800 mw unit vould leave 600 mw idle the first year, 400 mw the second year, and so forth. For the system planner, there is again a compromise between the economies of scale available from large units and the cost of maintaining idle
[' k generating equipment, namely, costs of capital and other fixed charges which continue without regard to level of use. Mr. Mayben explained how by " coordinated development" of generation, two or more utilities can pool their load growth and efficiently use large-scale base load units. He listed a nu=ber of varying arrangements or methods used to carry out programs of " coordinated development"--including joint construction or joint ventures, with equity participa-tion for each of the participants, and sales of " unit power" by-contract for~ the life of the unit. The purchaser under a
" unit power" contract is entitled to poner from a specific generating unit (or plant) when that unit (or plant) is in
, operation. Another method is that of " staggered construction" v 32
i 1 i. l( r s in which one utility builds a unit larger than its needs and markets its temporary surplus and then another takes its turn in adding a large unit. (Mayben, direct, Tr. 2649) These r methods are well known and are sucmarized in two Edison Electric Institute (EEI) documents, outlining the purposes and methods of coordination and the history of the coordinat-ing and integrating process, which were introduced as D.J. Nos . 16 7 and 234. * / As in the case of reserve sharing, the small systems dealing .)nly uith the larger system or pool is placed in an unfavorable bargaining position. (Mayben, direct, Tr. 2649)
^ ,_ The benefit or value of the " coordinated development" arrangc=cnt to the smaller cne is greater than its value to the large system or the membars of the large pool. lir.
Mayben explained that where the systems had equal bargaining strength, typically the sale was made at the average cost of the new unit in contrast to average system-wide cost--some-times referred to as fully distributed cost. (Mayben, direct, Tr. 2718)
- 3. Joint Trcnsmission Arrancements (Wheblint),
A third form of coordination is achieved by coordinating the construction and operation of transmission used for power exchanges. If small systems are quite far apart, the cost of
*/ Applicant initially challenged the competency of the Toregoing exhibits but withdren its challenge following the '~
Department's subpoena of 11r. Walker Cisler, chief executive officer of Detroit Edison and head of an EEI committee associated with the reports. 33
_ __~ __ = , . . _ - s constructing the intervening transmission =ay out.eigh the savings involved in the coordinction of operations and
' develop =ent. As the two syste=s grou in size, the feasible distances of constructing trcnsmission becc=e greater.
However, the addition of core systers to the arrange-ment can also justify a progrc= of coordinated development. Mr. Itayben used as cn illustration two hypothetical syste=s, A cnd B, locceed just so far away that the cost of construct-ing cnd operating trens=ission outvaighed the savings from reserva sharing cnd coordinated develop = ant. He then postu-lated two other independently owned isolated systees, C and D, which were located between A and 3. While the A-3 coordi-(^ nated syste= rould be econo =ically unfectib12, se A-3-C-D system rould be feasible since thera is core generatica and load to share de expense of trcnscission. Mr. Mayben was then asked to assu=2 the properties of C cnd D were ccquired by the dominant bulk pouer supply in &e crea or reg on. i Ee explained thct A cnd 3 would find a coordincred transmission arrcnge=2nt "uheelins" power over 2 2 lines of 22 dominant syste= of valus even after pcying the fcir costs of the use of trans=ission. Tae domincnt systc= uould find it of little value (Mayben, direct, Tr. 2733-2737) even though it =ight Set some benefit from scle of surplus transmission capacity. 4 Preemotive Coordination. While a icrge utility or pool =2=ber ccn retcin co= para-tive cost advantages by refraining from pooling with a s=all 34-
~
( ( system, sometimes it enters into a coordination with a small system, as a long-term strategic device. This occurs when two or more small systems in the area of a large one start evaluating and planning for coordina-tion. The large system has more to offer in a coordination than either c f the small ones, both in terms of reserves and load growth,1f it wishes to do so. Accordingly, when the large system gains knowledge of the possible interconnection between twa or more small systems uhich could lead to the growth of a steall-scale alternative power exchange, it could offer a so-called " sweetheart contract" to one of them. It
-- would offer only enough coordinating benefits to prevent the
_ small system from joining the alternate pcwcr exchange and enhancing its size. Mr. Mayben referred to this conduct as preemptive .. coordination since it preempts coordinating cpportunities from the other entity or entities which do ne t have access to adequate power exchange services. In the lor.g run, the system not having the power exchange access nay fail to sur-vive; and the previously favo, red system may then find it difficult to renew its arrangements for power exchange (Mayben, direct, Tr. 2635-40). 35
C. NATURE AND EXTENT OF COMPETITION g- IN THE SALE OF POWER i
- 1. Bulk Sucoly of Uholescle Firm Pouer.
- a. The Self-generation-Purchase Power Alternative The principal form of actual competition in the whole-sale firm power market in the lower peninsula of Michigan arises from the alternative that C. P. Co'. wholesale custoners have of installing self-generation-- either on an isolated basis or on a partially or fully coordinated basis -- or of purchasing wholesale firm pouer.
In the period of 1960 to present, the record is replete with exampics of such competition. Indeed, there is no dis-agreement between the parties over the existence of this competition. Applicant's witness Paul testified:
\
N Q. You said that the company supplied only about 17 percent of the bulk pcwer requirements of systems. Is this because the Compcny has been unwilling to supply a greater portion of these requirements? A. No. The company, since 1960, has
. responded affirmatively to any request for bulk power by these systems and in effect han actually promoted the bulk powcr supply to those systems in certain circumstances.
Q. In your view, with whom, or uhat was Consumers Power competing for this bulk power business during the period since 1960, Mr. Paul? A. We were essentially competing with their own self-gener ' tion and with bulk poucr suoplies from other sources. (Paul, direct,Tr. 7879) In a talk to his fellow workers, Mr. Paul put it a little more bluntly: " Engineering cost studies unre made for Petoskey and Holland in hopes of increasing sales to their customers
~
and foresta11ing the installation of additional generating facilities." (D.J. No. 188, page 4) _ _ - - _ - - - - - - - - - - - - - . - - - - - - - - - - - - _ - - - __ - - m
( Applicant's dealings with the Northern Michigan and Wolverine Cooperatives, represent other exc=ples of the oppor-tunities for competition which inhere in the self-generation alternative. Under present-day REA regulations, __/ coopera-tives' generation is only financed when either of the follow-ing conditions is present: (1) no firm bulk power supply from another source is available or (2) the firm bulk power supply available from another source is higher than the cost of scif-generation. When the Northern Michigan and Wolverine G & T's, after a cost evaluation in the 1960's, decided to go forward with expanding their own generation, Applicant's efforts to sell its own power to these entities continued. Applicant carried its case to the distribution cocperative =c=bers of the G & T'.; (D.J. No. 143), the public newspaper (D.J. No. 145), radio and T.V., the Rural Electrification Administration, and the Congress. As Mr. Paul put it: With the decision made to proceed with addi-tional generation, Consumers Power withdrew our special rate nrocoscis and informed the two G & T cooperatives that we were cancelling their existing contracts. It was indicated, however, that if the cooperativen wish to continue the connections uith Consumers Power Company, new contracts :: auld be negotiated on our then new standard wholesale power rates.
./ REA Bulletin 20-6 (D.J. No. 7): For a period in the 1960's, REA had a third criterion which permitted 1chas for G & T where bulk power suppliers imposed antico=perition restrictions such as dual rates or restrictions on resale to industrial end commercial loads and the like. Paragraph IIc of R.E.A.
Bulletin 20-6 dated May 31, 1961 providing for the 3rd criterion, was revoked by Revised Bulletin 20-6, May 7,1969 (D.J. No. 7) 37
k Consumers Power Company is still officially on record as opposing the new loans for generation here in Michigan. In September of 1965, we called on Mr. Norman Clapp, REA Administrator, in Washington to protest these loans. (D.J. No. 188, p. 6 ) (Emphasis supplied) Although the record discloses that some systems abandoned the bulk power supply business service in 1960 altogether (e . g . , Petoskey, Charlevoix),others such as the City of St. Louis changed from generation only to part generation-part purchase (D.J. No. 209). Others such as Holland, which had
- en purchasing some of its requirements from Applicant, returned to full generation (D.J. No. 2071 Allegan Municipal, which had initially contacted Applicant for a sorcce of emergency standby (D.J. No. 1783, was persuaded
{ to sell its system to Applicant (D.J. No. 179), which thus captured the entire load Applicant contended thst if Allegan would sell its system to Applicant, Allegan would " share in the economic advantages of nuclear pover" and that it could get " emergency bulk power interconnected with other large utilities." (Int. No. 1036) Allegan had been competing on a house-to-house, street-by-street basis with Applicant; but Applicant, in an internal memo prior to its acauisition of the system, evaluated its prospects as follows: Recent annual reports pertaining to the City of Allegan Electric Department indicate rapidly increasing expenses with small increases of income. Although sales increased slightly over a ten-year period, growth alone is insufficient in coping with soaring expenses. Considering that Consumers 38
_ _ . m,,. ._ _ -_ _ _ _ _ . ., _- _ Power Co. has chosen to be a good neighbor and has not undertaken an aggressive competitive policy, it is doubtful that future sales revenues are assured. Recently Consumers Power Company reduced rates and made available new customer services, such as: low electric spaca heating rate, fast recovery water heating rate, and underground electric service, niaking Consumers Power Co. service attrac-tive. A major factor contributing to the rapidly increasing operating costs is the diesel electric generating expense; with the hydro generating capacity limited, the diesel plant is recuired to provide all of the additional power requirements. Present trends of operating cost , for diesel power are expected to result in further increases. ( D.J. No. 177)
~
A similar enticement was held out to the City of St. Louis ,- (Int. No. 1045, p. 3). The City will benefit from the many services available from the Company . . . from t:echnological advances resulting from continuing research and development . . . for exanple, in the c'evelopment of . . . nuclear power. As recently as November 9,1971, Applic ant urged the City of Portland to abandon its costly diesc1 generation and purchase substantially all of its r'equireme':.ts from Applicant. */ D.J. No. 15 provides further insight i. Applicant's competition for loads as against self-generetion: (2) Company sales to the City of etoskey have increased greatly with a correspo; : ling decrease in their generation. (10) Attempts are now being made Consumers Power Company to sell Zeeland wholesa) . power. (12) The City of Allegan owns and operates a generation and distribution system. 't . O Company competes for retail business in a larr, part of its operating area. Efforts are being :.ade now to either purchase the Allegan system or *cll power wholesale.
. , , _ .. _m._
-[ (13) The City [of South Haven] has asked for a proposal on wholesale power.
. (16) The City of Coldwater is installing some additional generating equipment which in all probability, will reduce the amount of wholesale power which the Company is now furnishing at this location.
(20) The City of Lansing recently annexed about 4 1/2 scuare miles of territory which is under franchise to the Company. Negotiations are now underway to sell the Company's distribution facilities in the area to the City and to also sell the City power wholesale which the City in turn will use to take care of the individual cus-tomers' recuirements. (213 Numerous attempts have been made to buy the power system belonging to the City of St. Louis. Efforts have been also made to sell power wholesale. An official of Applicant summarized the state of its com-
~
petition with,the self-generation alternative in D.J. No. 188: Since 1950, Consumers Power has purchased 6 municipal electric systems. An offer to purchase the Charlevoix system was turned down, but we are now supplying most of Charlevoix's requirements. In 1965, when it became apparent that Traverse City was about to expand its generating plant, we attempted to head this off with a lease proposal, but this never got very far. We offered Traverse City $528,000 per year for 30 years but could not generate enough interest to. sell the propositi on. The City is presently only realizing about $100,000 per year from.the electric operations plus a $130,000 rate differential, but this is substantially less than our $528,000 figure. This indicates the difficulty in attempting to purchase or lease these systems. The REA and public power group exerts a strong influence in Traverse City. Northern Michigan G&T has an interconnection with Traverse City. Also in 1965, we offered to purchase the St. Louis electric system for $825,000. This has not been officially acted upon as yet. Wolverine Elect:.ic G&T cooperative attempted to interest St. Louis in a so-called interconnection agreement. \ '-
-We are in t proposals to the,he process City of submitting of Allegan for its purchase sys tem and to Grand Rapids and the City of Wyoming for their 40
street lighting systems. Wolverine Electric Cooperative also offered to make a connection with Allegan. Other In addition to these accuisition problems, we have also been working to increase our wholesale power sales to other customers. Engineering cost studies were made for Petoskey and Holland in hopes ofincreasing sales to these customers and forestalling the installation of additional generating facilities. These efforts were success-ful in Petoskey, but Holland plans to go ahead with a 30,000 kw unit. New opportunities for self-generation can arise in areas previously served by Applicant at retail when municipali-ties decide to establish municipally owned electric systems. This has happened in Applicant's area. Applicant's R. L. Paul testified: (<- ( In the case of Zeeland, at one time the com-pony uns the nn1y system franchised and operating in the City of Zeeland. Zeeland established a municipal system and subsequently did not renew the company's franchise to operate in Zeeland. However, they have continued to allow the company to remain there and serve the customers that they were serving. However, our experience has been that we are gradually losing these cus-tomers over a period of time as buildings are vacated, changes of business, and this sort of-thing, since the City will not allcw us to serve any new customers. (Paul, cross, Tr. 7814 ) Mr. Westenbroek, who had worked for the system, related how it grew from its start as a municipal street lighting system purchasing at wholesale from Applicant.
/
41 s_
I i Municipal entry, upon expiration of terminable franchises ji/ or condemnation during the term of a franchise or for a so-called Foote Act -franchise (Pub. Acts, Michigan, (No. 264, 1905), is lawful and proper;**/ and entry by cocpeti:4 on a customer-by-customer basis is also legally feasible.***/ , Applicant's witness Pace claimed there were barriers to entry of new municipal systems,_the most stringent barriers existing in the so-called Foote Act areas, but conceded these barriers might be overcome with sufficient economic incentives such as offering by the cities of rates significantly leder than those of Applicant:
- O. Suppose that in a particular market there is only one supplier and he's charging more than the cost of a new entrant to supply? Would there be an incentive to entry?
A. That's the basic general incentive to enter. In other words, the competition has an incentive to enter as a general prcposition when he sees the possibility of earning super-normal profits, as
. economists call it; whether or not he can in fact pull that off depends on barriers to entry.
(Pace, cross,Tr. 7260-1) - In sum, an important aspect of wholesale competition hinges on the decision of existing independent systems in Michigan whether to use self-generation to meet their e::panding
*/
EIch.Michigan Const.'171; 522. CityArt..of VII,Detroit Sectionsv.21, 24 andUnited 29 (1963); Stat. Ann. Detroit Ry., 172 Mich. 136, 137 N.W. 643, aff'd 229 U.S. 39 (1913).
**/ Michigan Stat. Ann. 58.71; Mich. Stat. Ann. 5.2079.
***/ Michican Cas & Electric Co. v. City of Dowaniac, 273 Mich.
I53, 202 N.W. 702 (1935). 42
needs for bulk power supply; whether to continue or to abandon existing self-generation; whether to sell their entire wholesale and retail systems. When a new distribution system is begun in an area previously served by Applicant at retail, it also confronts a range of alternatives for bulk power . supply. .
- b. Self-generation by Existing Intities Which Have Some Access tc Porer Exchange in Competition with Purchases of Bulk Pawer from Appliccnt.
A variant of the foregoing competition concerns the special circumstancer of systems which are able to consider limited coordination with the M-C Pool, or perhaps others. To the extent the M-C pool provides power exchange services to each of its members (and to four satellite municipals), which lowers the cost of firm bulk power supply to them and makes self-generation more competitive with firm wholesale power from Applicant, the M-C pool's offering of power exchange has also been l l a source of competition to Applicant, which. offered wholesale
' firm power. (Paul, cross , Tr. 7974-5) Paul testified that Traverse City, Lowell, Allegan, and St. Louis (Paul, cross, Tr. 7974-5, 7975, 7976, 8038) were the subjects of this type of competition. And he testified of his concern over an increase in that type of competition (Paul, cross, Tr. 8037-8) .
l l A further type of competition would occur if Applicant had l difficulties in financing and had to sell out to a municipal l l system as did an early competitor of Lansing (Paul, cross, Tr. 7995-6). 43
w -
- c. Potential Competition From New Municipa'l Entrants to Supply the Bulk Power Needed for Their Own Retail Distribution System by Self-Generation Such competition necessarily depends on entry of retail distribution systems and is discussed below.
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- d. Competition From Two or More Alternative " ~~
Uhol analers of Bulk Power The offerings of firm bulk power supply by two or more wholesalers of firm power has been relatively rare in Michigan's lower peninsula. The Department's witness Mayben testified that the economics of transmission lines to supply power to a distant system basically depend on the size of the load and the dis-( tance from existing facilities (Mayben, direct,Tr. 2812). A small utility in the middle of the lower peninsula would have to obtain transmission service from Applicant to be able to deal with a bulk power supplier.other than Applicant, or else build his own trcnsmission which may approximate $30,000 per mile for 138 kv facilities, more if higher voltage facilities are necessary (Mayben, direct,Tr. 2816). As we demonstrate below, Applicant [1as not made such transmission services available to small systems. Further, REA law authorizing financing for rural cooperatives would preclude a G & T from obtaining a loan to supply firm power to a municipal with a population exceeding 1500 (7 U.S.C. f913 (defining " rural area")).
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44
g ._ _ -= ~..-__x. - _: . . - _x _ = - _ ~ 1 l l I Municipals have heretofore not been a source of firm power to other cities, possibly because of the so-called 25*/. rule (Michigan Const. Art. VII,Secth.on 23(1963f). (Steinbrecher, direct,Tr. 1217-19). Alpena Power, a private corporation, while legally able to compete in the sale of wholesale power. with others,as a practical matter of economic feasibility _cannot even justify bulk power supply for its own system. It purchases its power - _some .50 mw -- from Applicant, except a small amount (7 mw) derived from three ancient hydroelectric plants,(Fletcher, direct, Tr. 4280). Effective competition in alternative offerings of wholesale
, power can exist where there are at least two systems having low-cost bulk power supply from integrated and coordinated generation and transmission facilities. As a practical matter, therefore, the opportunities for such competition have been limited to small systems located on or near the eastern er southern boundary of Applicant's system, reasonably close to a major system such as Detroit Edison or AEP.
There is a difference in position as between Applicant and the Department as to the reason for the lack of competi-tion for the wholesale needs of small utilities where alter-native wholesale' offerings are economically and technically feasible. Applicant contends this is based on the unilateral decisions of the various parties. The Department contends there is substantial evidence of territorial alloca-
. tion agreements in Applicant's dealings with the former 45
,' Michigan Gas & Electric Co. , Toledo Edison Co. , and American Electric Power (to be discussed below). The only competition at wholesale between Applicant and its major neighbors from 1960 to date is shown by the record to be as follows: In Paw Paw Applicant submitted an offer for power supply in competition with that of the former Michigan Gas & Electric System only af ter AEP had made a tender offer for the latter's stock. In 1960, the Village of Constantine indicated an interest in having Applicant, rather than Michigan Gas & Electric, sell it power or in the alternative sell its system to Applicant. G. W. Howard, an employee of Applicant, in a letter to B. G. Campbell, evidenced his recognition of the " gentlemen's agreement" on respecting each other's territory: We realize, of course, that we do not want to offend the Michigan Gas and Electric Company by serving customers in their area. However, since the Village of Constantine has always been unhappy with Michigan Gas and Electric, maybe there could be a mutual agreement worked out whereby we could serve Constantine. (D.J. Po. 157) In the case of Southeastern Michigan Rural Electric Cooperative (Southeast Coop), af ter Applicant complained of Southeast Coop's aggressive retail competition and advised Southeast that it was terminating its power supply contracts, Detroit Edison offered to supply Southeast Cacp with a bulk power supply if Southeast built transmission to Detroit Edison's facilities in Detroit Edison's serv!ce area (D.J. No. 128, No. 2). */ Detroit Edison sent a letter to Applicant
*/ "No. 2" refers to the document number pr.vided by the Uepartment of Agriculture certificate list, ppendix A of the Index to Department of Justice Exhibits.
u
P < advising Applicant of its offer to Southeast. The cost of transmission made the alternative of switching all of Southeast Coop's load to Detroit's system prohibitively expensive, but Southeast Coop and REA engineers calculated that enough trans-mission to serve some of Southeast Coop closest to Detroit Edison could be justified marginally and ultimately suitched a portion of its load to Detroit Edison's supply. (D.J. No. 128) In the case of South Haven there were offerings of whole-sale power from Applicant and AEP to South Haven, but these occurred at different times and were each competitive with South Haven's generation rather than with each other. (Paul, cross,Tr. 8098-8101) t It seems fair to conclude that competition from two d alternative offerors of power supply integrated systems hav- h ing low-cost bulk power supply from large units has been only l sporadic in Michigan's lower peninsula, although the Depart-f ment contends below that such competition could and should be j available both to peripheral systems directly, and to the f interior systems via wheeling arrangements. l There is no requirement nor authorization of wholesale territorial allocation arrangements under the Federal regula-tory scheme. Indeed, Section 10(h) of the Federal Power Act prohibits combinations, agreements, arrangements, or under-standings, expressed or implied, to limit the output of elec-trical energy, to restrain trade, or to fin, maintain, or increase prices for electrical energy or service. Such 47 i
=
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/
allocations were attacked under Section 1 of the Sherman Act in U. S. v. Florida Power Corporation and Tampa Electric Company (1971 CCH Trade Cases, T 73,637, M.D. Fla. , 1970), where following the denial of motions to dismiss for failure to state a cause of action, the defendants agreed to cease their restrictive practices.
- 2. Retail Power, a.
Competition, at Actual and Potential, for Large Blocks a Sincle Time. Retail competition, in contrast with wholesale competi-tion, is competition for the loads of ultimate consumers of electric power. It takes two principal forms -- competition { for the franchise or opportunity of serving blocks of ultimate consumers on a de facto more or less exclusive basis,and boundary or overlapping service area competition among two cr more suppliers for individual customers. The latter we shall refer to as "one-at-a-time" competition. In the lower peninsula of Michigan both forms of retail competition have been in evidence. Applicant has obtained blocks of new retail customers by persuading the citizens in some towns that it could prov;de more satisfactory electric service than the existing municipally owned systems. Such acquisitions have tak'en variots forms, such as Applicant's acqui-ition of the facilities of the A1.legan or Grayling municipals or cash, or by exchange of shares for those of the Rogers City system, a private corporation, (Paul, cross, Tr. 7992).
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k. The formation of a new municipally owned system in an area served by Applicant would similarly represent a form of retail competition. Mr. Paul (Paul, cross,Tr. 7994) thought it possible in non-Foote Act areas to start up a competing municipal electric system although very unlikely in an area where his company had a Foote Act franchise unless (1) his own company had difficulties ir raising capital to meet its financing needs (Paul, cross,Tr. 7996), or (2) a municipality was able to construct and operate a distribution system and in competition with Applicant sell power at rates approxiuately 20% below those of Applicant. Under those circumstances,
, Mr. Paul agreed there would be competition in those areas.
(Paul, cross,Tr. 7997). Chairman Garfinkel got the clearest view of the Appli-cant's concern with retail competition when he asked Applicant's chief executive Aymond: CHAIRMAN GARFINIGL: But where is the competi-tive advantage? WITNESS: The competition comes in, Mr. Chairman, in the way the customer feels about our situation. For example, Lansing, which is the largest nunicipal system, as I referred to is really in the heart of our service area sells power at a considerably lower rate than Consumers. They can do that today with their interest and tax subsidies. Now this makes our customers unhappy with us, and this is published in the newspapers: i ' Lansing has another great year; rates are 20 percent below Consumers Power Company' --or whatever the percentage is. And pretty soon you find that pecole in the environs or Lansinn vant to leave Consumers - Power Company and become part of the Lansing system. So this is~one of the things we are concerned about. (Aymond, cross ,Tr. 6060-2) (Emphasis added) 49
t While Dr. Pace testified that there were barriers to entry on the part of municipal distribution systems, particu-larly in Foote Act areas, he recognized that rates as much as 20% below those of Applicant might overcome such barriers (Pace, cross , Tr. 7271-73). Where Applicant perceives the likelihood of successful competition, it could well decide to sell its facilities :Un
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the area to its competitors; thus no duplication of facilities would occur. This was its strategy in the Lansing North School District (Aymond, cross, Tr. 64611 If the competition had been as strong in Traverse City and Bay City as it was in Lansing, Mr. Aymond testified, it might very well have adopted its rame strategy in those cities (Aymond, cross, Tr. 6465-66).
- b. "One-customer-at-a-time" Competition.
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"One-customer-at-a-time" competition between electric utilities to serva retail loads has been restricted by a variety of state laws and regulatory directives. These restrictions have changed from time to time. The laws and policies are summarized below as applied to facts of the instant proceeding.
(i) Between Applicant and rural cooperatives for existing customers or new loads An important factor in the competition between Applicant and cooperatives is the " single-phase rule" (D.J. No. 9). Ji/
- */ In the Hatter of Adopting Rules Governing the Extension cit" Single Phase Electric Service Wo. U2291 (MPSC, March 24,
-1966).
50
e Essentially, this rule provides that an existing customer receiving single-phase load is to be served by the utility with the nearest distribution facilities. Although, Applicant's official, Mr. Paul, testified that this single-phase rule had virtually ended all competition for single-phase loads (Paul, direct, Tr. 7846). Mr. Westenbroek stated that the competition for single-phase loads left open by the rule is significant (Westenbroek, direct, Tr. 985). Applicant initially contended that the Michigan Com-
,- mission had no authority to prescribe such a territorial allocation (Paul, cross, Tr. 8123); though it has volun-tarily followed the rule and to date has not contested the Commission's authority (Paul, cross, Tr. 8123).
Applicant'e chief executive, Aymorid, stated that he believes it is too late to contest the prevision -- that it has gone uncontested too long (Aymond , cross , Tr. 6542) . It seems very questionable, however, that authority or jurisdic-tion could be conferred by waiver on long standing adherence to the regulation. Crenshaw v. Great Central Insurance Co., 482 F.2d 1225 (8th Cir. 1973); State of Wisconsin v. F. P. C. , 210 F.2d 183 (D.C. Cir.), cert. den. 345 U.S. 934 (1952). 51
x If the rule were successfully challenged, fif the competitive situation in Michigan would be similar to that existing before 1966. Prior to adopting the single-phase rule, there was vigorous competition between Applicant and various cooperatives-both for existing and new customers (Westenbroek, direct, Tr. 982). As stated by Mr. Paul in D. J. No. 188, p. 6, "In an area where we were franchised to serve we felt obligated to do so, and began picking up a few REA customers." An internal memorandum puts it a bit more strongly: This letter will outline the aggressive competition we are experiencing in the Tecumseh area in connec-tion with serving residential customers adjacent to our electric lines and also in the general area of customers adjacent to our electric lines and also in the general area of the Rural Electric Coopera-tive where we supply power on a primary basis. One must ask what needs to be done here? This
, activity is cancerous in our franchised area. We need bold strategy--sustained positive action. I want to do my part. (D.J. No. 115)
Similarly, Applicant's B. G. Campbell once termed the competi-tive relationship between it and Southeast Coop as "open aggression." (D.J. No.119 )
*/ The Michigan Public Servf.ce Commission has only such powers as are specifically conferred on it by the Michigan legislature. Huron Portlend Cement Co. v. Public Service Commission, 351 Ilich. 255, 63 N.W. 2a 492 (1956); ano nowhere in the statutes has the Michigan Commission been specifically authorized to limit service territories or line extension policies in rural areas. While an argument can be made that Act 69 of 1929 would support application of the rule within L cities, its application is to competition between private corporations and rural electric cooperatives in rural areas.
52
x - f Single-phase loads, for all practical purposes, are samil loads (up to 25 kw), although there are a few exc eptions. Three-phase loads, on the other hand are ordinarily larger industrial and commercial loads. (Westenbroek, direct, Tr. 966, 967) While some three-phase loads may be as scall as 5 or 10 kw,they generally range from 25 or 50 kw and up. (Westenbroek, direct,Tr.967f There is presently no comparable rule restricting com-petition for three-phase loads, although the promulgation of such a rule has been discussed by a committee of the Michigcn Electric Association, an organization of private electric and gas utilities. At the suggestion of the MPSC to the coopera- [ tives, Mr. Westenbroek attended a meeting to discuss the
\_
proposed three-phase rule. Based on discussion of the committee, a draft has been circulated which anplies rules similar to the single-phase rules to the smaller three-phase loads. (D.J. No. 11; Westenbroek, direct,Tr. 971) Because of their difficulty in comr9eing for the larger loads, ji/ the coops have preferred to have the rule all encompassing or at least extended to very high limits, such as loads of 300 kw. (Westenbrock, cross, Tr. 1036 ) Applicant's representatives at'the liaison committee to discuss the proposed three-phase rule stated their preference that the
*/ Westenbroek explained that Applicant had an uniform rate I3r both urban and rural areas and that he believed the custo-mers in the densely populoted urban areas such as Grand Rapids
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subsidized the rural customers. Coops are prohibited from initiating serving in towns exceeding 1500 (Westenbroek, direct, Tr.938-39,and, accordingly, served only the core sparsely settled areas. (Westenbroek, direct Tr. 986-87). o --
- v. -
., ~ ._ . - . -
rule cover loads only up to 25 kw, but reluctantly agreed to have the rules cover loads up to 75 kw. (Westenbroek, cross, Tr. 1036-37; Wes tenbroek, Tr. 974) . Mr. Paul testified that there is infrecuent competition for large loads between cooperatives and Applicant. When the point was pressed, however, he recognized that the reason was not any inherent infeasibility of competition but rather the cooperatives' unfavorable competitive position (Paul, cross, Tr; 8128-38). The coop representatives made clear that they would like to compete for large industrial loads. * / _ Westenbroek explained how such loads can bring heavy revenues l to a sparse rural system and help lower the overall system costs of service (Westenbroek, direct, Tr. 983, 986-87). D.J. No. 1 11 shows the loss of such large loads as GM and Stauffer Chemical to the Southeast Coop. As Applicant, who was Southeast Coop's l bulk power supplier put it in an internal memorandum: "Of r prime importance are the two large customers, General Motors l and Stauffer Chemical, which the Cooperative had visions it 1 might conceivably serve." (D.J. No. 118)
*/ Applicant presented, through Mr. Paul, a study to show
- teat large loads only infrecuently occurred in competitive areas. (C.P.'No. 11,305) But it was limited to loads over 3000 ku, very larne loads. Even the proposed three-phase rule would leave open competition for loads between 75 kw end 3000 kw.
l At the present time all three-phase loads are open to competition. And although Mr. Paul's study showed the extremely large, over 3000 kw, loads occurred very infrecuently in competitive areas, even one of those loads could be extremely important to a cooperative. [ 54
r In sum, we submit that the opportunities for competition in serving large new industrial lococ will surely exist if the cooperatives can attain competitive bulk power supply I costs. I (ii) Between Applicant and municipals in Bay City, Traverse City, Zeeland and Lansing; in fringes of other cities where Applicant has facilities; within other cities where Applicant has obtained limited franchises. . In some cities, including Allegan, there has been vigorous ;
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house-to-house, street-to-street competition for existing and j new customers; but this competition remains only in Bay City -l and Traverse City, where Applicant has Foote Act franchises. A similar competition in Allegan ended when Applicant pur-chased the system. In Zeeland, according to Applicant's i Paul, Applicant had a revocable franchise which was revoked by Zeeland. Applicant continued to serve its existing custo-mers but served no new ones. Gradually it lost nearly all of its busi-ness 'in Zeeland (Paul, direct; Tr. 7814, Westenbroek, direct,Tr.93S-3 9) I; There is also competition between Applicant and municipals in the areas outside the cities. While municipalities are unrestricted in service at retail within their boundaries, h h they were, until very recent!1y, prohibited from selling outside t Q their city limits more than 25% of the amount of electrical energy sold within the corporate limits. This restriction as originally incorporated in the Michigan constitution of 1908 was an absolute constitutional prohibition, */ but it __/ Mich. Const. Art. VIII, Section 24 (1908).
was changed in 1963 so that the 25% limitation could be modified or removed by statute. */ (Brush, direct,Tr.2241) Several bills removing or modifying the 25% limitation have been introduced in the state legislature in the past at the instance of the Michigan Municipal Association but have been blocked in committee or have failed to pass because of the opposition of Applicant and other private corporation utilities. (Brush, direct, Tr. 2255,56, 2262-64, 2280-82) However, following the conclusion of the hearing in this case, on June 20 and 23 of this year, two modifying statutes were
'^ enacted, which apparently eliminated the 25% limitation. **/ _
For political reasons some municipalities are reluctant to serve outside their boundaries (Westenbroek, direct, Tr.978-79) . Others such as Lansing and those urging adoption of legislation apparently have a great desire to serve in municipal suburban areas (Brush, direct, Tr. 2247-50). Lansing, while anxious to serve in the suburbs, is not anxious to engage in customer-by-customer, street-by-street competition (Brush, direct, Tr.2258-60). As noted above, however, to avoid the possibility of such _/ Mich. Const. , Art. Vli, Section 24 (1963).
**/ Pub. Acts Michigan, (1974), Acts Nos.157 (June 20, 1974) and 174 (June 23, 1974). Despite this legislation, the 25%
limitation remains in one statute and it seems likely that the Michigan legislature will subsecuently have to clarify this statutory conflict. In the past there was also some ( doubt as to whether the 25% limit covered wholesale or inter-
. change power (Aymond, cross , Tr. 6133i. Applicant's Aymond did not believe so and suggests he would not have opposed its removal from the limitation (Aymond, cross, Tr.6133).
HowcVer, D. J. No. 229 shows Applicant's absolute opposition to change in the limitation uithout regard to its coverage of wholesale as well as retail power.
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competition with Lansing, Applicant sold a large block of its facilities to the city. (Aymond, cross, Tr. 6461-62, 6465). Applicant's "one-at-a-time" competition uith municipals for retail customers is not limited by the Commission's single-phase rule (nor would it be by the proposed three-phase rule), which governs only extensions of service in areas served by two or more utilities subject to the juris-diction of the MPSC. Therefore, both extensions of service by municipalities and extensions of service by Applicant in competition with a municipality are not covered. (iii) .Betueen private corporation electric utilities.
<- There does not appear to be extensive competition between private corporation utilities for retail loads.
Although there are some legal restrictions on one-customer-at-a-time or door-to-door competition, jl/ there remains es a matter of law, substantial room for such cocpetition. This is true even if we assume arguendo the validity of the single-phase rule and the adoption of the draf t of a three-phase rule. As a practical matter, either through unilateral decisions or through gentlemen's or express written agreements such as between Applicant and Detroit Edison (D.J. No. 110),
*/ While neither the fixed-term franchises nor the Foote IEt franchises granted by conicipalities may be exclusive, legislation was enacted in 1929 which recuires private corpora-tion utilities to seek the permission of the Michigan Public Service Commission prior to extending new se rvice to a municipality in which another "public utility" (defined to exclude municipal utility) is providing the same sort of service. (Act 69 of 1929, D.J. No. 3) 57
_ . __ _ _ - ~ - _ _ - , . . . - - - - - - -_
-. w ,e,,
(' there does not appear to be much retail competition between private corporation electric utilities for particular retail customers in Michigan's lower peninsula. While there is greater service area overlap between areas which rural coopera-tives serve and those in which Applicant has sought franchises to serve (Westenbroek, direct, Tr. 984-85; D.J. Nos, 19 and 204), virtually no competition remains for existing customers onew at-a-time, and little for new loads. There is fierce competi-tion for customers one-at-a-time between Applicant and the Cities of Bay City and Traverse City (Aymond, cross, Tr. 6542) which could also occur from a legal standpoint in other Foote Act cities and cities where an outstanding franchise is held
/-
by a private corporation utility and a new municipal distribu-tion utility initiates service. Where the rate differential is great enough, the parties may agree on a purchase and sale of facilities rather than engaging in competition for customers one-at-a-time. Competition for enisting and new customers between Applicant and municipal utilities other than Day City and Traverse City exists mostly outside the citics */ which was formerly restricted by the 25% rule. Applicant apparently favors restrictions on competition for smaller loads and favors " customer choice" for the larger loads, although whether this policy was designed as a result of Applicant's better chance of winning large load competition was not willingly conceded by Applicant's representatives. s_ (Paul, cross, Tr. 8127-28).
*/ Applicant has obtained franchises to serve large loads within some cities. (Munn, direct, 4063-64, Paul, cross, Tr. 8018)
d
- 3. Power Exchanne Services.
In certain circumstances there can.be significant competi-tion among groups of electric utilities for power exchange services. Thus the record suggests that there was competi-tion in such service between the Michigan Pool and power systems in New York for power exchange transactions with Ontario Hydro. (Page, cross, Tr. 7446). This was revealed when Applicant sought to justify to the Michigan Public Service Commission certain transactions with Ontario. Hydro at below fully distributed cost. The Department contends that such a kind of competition can and should take place, particularly alternative oppor-tunities for coordinated developments as illustrated by Mr. Helfman's Cases III and IV. There would be no competition for reserve sharing arrangements as the more widespread the arrangements, the greater the benefits. Applicant computed that with its own large generating units it would recuire 24% reserves; sharing reserves with Detroit Edison, the pool would need 19.%. Additional interconnection with Ontario Hydro would reduce reserves to 15%, and finally connections to the south to the MII0 systems would reduce Applicant's rcserves to 12.5%. (Wein, p.d. 62, Table II, D.J. 65, p. 2). [ k' 59
m- m IV. ISSUES OF LAW A. Whether actual and potential competition of the sort which exists in wholesale and retail firm power markets in Michigan's lower peninsula is protected by the anit-trust laws and Section 105c. B. Scope of Section 105c. (5)--whether a situation incon-sistent with the antitrust laws is maintained by ac-tivities under the license if:
- 1. The situation, i.e. , the market structure and Applicant's conduct in it, effect for Applicant an advantage over its competitors, and the existing situation maintains and enhances such advantage; or
- 2. Applicant has been shown to have market power and has evidenced an intent to monopolize which those advantages of the~ license related to the market power will help it carry out. ,
f~' C. Whether the existence of partial but not comprehensive regulation of privste corporation electric utilities with gaps in regulction of power exchange marketing, immunizes the exercise of anticompetitive conduct which would otherwise violate or be inconsistent with the antitrust laws1when Section 105a. specifically reserves the antitrust sus and Section 105c. requires,he t Commis-sion to implement their policies; whether the relief requected would conflict with state and other Federal law or regulation including the effect of such conflict, if ' any. D. Whether the existence of tax and financing differences between Applicant and many (but not all) of the smaller systems in its crea is relevant to whether Applicant ! may be required to correct its restrictive power exchange l practices; whether an anticompetitive rertriction is unlawful and must be removed where those adversely af-fected survive and even prosper despite the restriction. I < ' E. Whether the Department's proposed licenso conditions should be daemed " appropriate" within the meaning of Section 105c. (6) if they will prevent meintenance of the existing situation inconsistent with the antitrust laws and carry out the purposes of the Atomic Energy Act. 1 m. 60 l' l 1
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V. ARGUMENT A. APPLICANT IS MAINTAINING A SITUATION INCONSISTENT WITH THE ANTITRUST LAWS
- 1. The Product and Geographic Markets Defined by the Depart-ment are in Accord with Established Legal PrincinJes The Department's contention that a situation inconsistent with the antitrust laws exists in Applicant's area of lower.
Michigan is grounded upon legal principles developed by the courts in construing Sections 1 and 2 of the Sherman Act. Section 2 of the Sherman Act reads as follows: ( Every person who shall monopolize, or attempt to monopolize or combine or conspire with any other person o,r persons, to monopolize any part of the trade of commerce among the several states or with foreign nations, shall be deemed guilty of a misdemeanor. (15 U. S . C . 2 ) We believe the evidence presented in this hearing is fully sufficient to warrant findings that Applicant has illegally monopolized the wholesale-for-resale firm power market in its area of lower Michigan, and thereby monopolized the retail distribution firm power market in thct area, in violation of Section 2. One element of the offense of monopolization as defined by the Supreme Court is "the possession of monopoly power in the relevant market." United States v. Grinnell Corn., 384 U.S. 563, 570-571 (19663 Monopoly power has been' defined
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1as "the power to control prices or exclude competition." 61
w- .- n-- _-_. _ s United States v. E. I. DuPont de Nemours & Co., 351 U.S. 377, 391 (1956). According to Grinnell and other Section 2 cases, the existence and extent of a firm's monopoly power is not to be determined in a vccuum, but rather in the context of a particular market or markets: "The ultimate consideration in such a determination [of monopoly power] is whether the defendants control the price and competition in the market for such trade and commerce as they are charged with monopolizing." DuPont, 351 U.S. 377, 380. The relevant market is the answer to the cuestion: A monopoly of what and where? A determina-tion of relevent markets in which Applicant's monopoly power may be demonstrated is thus prerecuisite to the Department's showing of inconsistency with the antitrust laws based upon the theory of Applicant's monopolization. The determination of relevant markets by the courts involves considerations of both product and geography. Grinnell, 384 U.S. 563; Dunont, 351 U.S. 377.
- a. The Product Markets.
The Supreme Court in DuPont stated the basic rule with regard to product market definition: "[C]ommodities rea-sonably interchangeable by consumers for the same purposes i make up that 'part of the trade or commerce,' monopolization of which may be illegal." 351 U.S. 377, 395. "That market is composed of products that have reasonabic interchange-
'- ability for the purposes for which they are produced--price, use and cualities considered." 351 U.S. at 404.
s 62
=_ -_ - . . _ . . _
The product markets selected by the Department for assessment of Applicant's monopoly power satisfy this test. The Applicant's proposed relevant marke ts do not. After consultation with Mr. Mayben, the Department's engineering expert in the principles of power supply, Dr. Wein, the Department's economist, testified to three product markets: the retail distribution firm power market, in which electric distribution systems supply firm power to ultimate consumers of that power; the wholesale-for-resale firm-power market, in which producers (or wholesalersT of firm electric power in
/
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bulk supply that power to the distribution systems; and the regional power exchange market, in which producers of firm electric power transact with one another for necessary inputs or f actors of producing firm poner in bulk. */ We do not understand Applicant to disagree that retail distribution firm power is a distinct product, not reasonably interchangeable with other products by consumers for the same purpose. Applicant and the Department part company, however, regarding definition of the remaining product markets : (1) the market for wholesale supply of firm power for resale, and (2) the ' regional market for power exchange services used to produce firm power. Applicant erroneously contends that wholesale firm power and power exchange services are inter-( changeable products, and thus the two markets are but one.
*/ Mr. .Mayben identified and explained these markets using a cnart, D.J. No. 197, L1agram of Consumers Power Company's Influence in the Three Classes of Elcetric Power Markets.
(Mayben, direct Tr. 2743)
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Such, however, is not the case. Applicant has confused factor markets with final product markets. Applicant and the Department agree that retail electric distribution systems require a supply of firm power in bulk. We also agree that those distribution systems have two alter-na,tive means of obtaining that bulk power supply: they may buy their firm power from another electric system that engages in the business of producing firm power for sale in bulk or they may themselves enter the business of producing firm power if it is econcaically feasible to do so. Firm power from wholesale purchase and firm power from self-generation-- ( insofar as they are reasonably comparable in price--are sub-stitutable products as viewed by distribution systems and thus in the same market. Our disagreement with the Applicant concerns the status of factors of nroduction of firm power in the product market framework. Applicant apparently would lump those factors of production together with the final product despite the fact that they are not substitutable for the final product--as Applicant's Dr. Pace admitted on cross-examination: Q. . . . Would firm power be substitutable for one of the services such as economy energy or emergency power-- Let's do it the other way first. Would emergency power or economy energy be substitutable for firm power? A. Not alone.
'w 64
, ,a -- - __ _ _ _ _ _ -__ __ _ _ __ Q. All right sir. Now, frc= a cost standpoint as well as a physical standpoint, wculd fir = perer be substitut-able for e=er;ency power or econc=y energy? A. It clearly would be substitutable frc= an electrical standpcint, as I understand it. Q. F.cw about frc= a price standpoint? A. It night not be (Pace, crcss,Tr. 7544). Applicant's view on interchangability is based on the flicsy argunent that if f actor A is co=bined with facters 3, C, and D to fer final product X, then the factor supply
=arket for A and the supply carket for final product X are one and the sa=e =arket. The absurdity of this thesis is e
de= castrated by Dr. Pace's testi=cny that the tarket for "heney" is the sa=e carket as the =arket for the " bees" which cake the heney (Pace, crcss,Tr. 7567-68). If cne's purpcse is to obtain sc=e honey for breakfast pancakes, the Department respectfully sub=its that purpose is not satisfied with a supply of bees and a canual en beekeeping. Likewise, as a theoretical catter, one desiring a residence could purchase sc=e nails and obtain the other factors fer the production of a house. Or, as a theoretical =stter, cne could purchase a house, entract its nails, and use them in new ccnstruction. But to do either of these would i;nore ce_aercial rcalities -- nacely the i=pertant reasons or purposes for the product de=and. c 65
L~ - - - _w_ ._: . k An examination of the reasons or purposes underlying the demand for wholesale firm power with those underlying the demand for power exchange services veriffes that they are two separate product markets. Some small electric utilities have chosen not to enter the business of producing their own power supply; instead they buy all their requirements. They need and want firm power on a long-term basis and are buyers in the wholesale-for-resale market. Those utilities having the purpose to stay out of the generation business cannot use a contract for r_ emergency power or economy energy. Dr. Pace agrees: (x [Q.] How, if I'm a full-recuirements distri-bution system, would I be interested in purchasing economy energy or emergency power? A. Well, you're getting that through the wholesale purchase. Q. No, sir. Would I go around looking for a contract for the supply of emergency power or economy energy? A. There vould be no point (Pace, cross,Tr. 7547). Others such as Lansing insist on' controlling the production of their own power supply. Still otheis view the opportunity of entering the power supply production business as a check on the price they must pay for power supply even though they l choose to purchase rather than to generate. In any event, when an electric utility does choose to remain in or to (\, enter the business of producing a power supply to meet its own needs or to resell to others, it seeks to participate in the regional power exchange market for coordinating power
2 _ _ . , _ s. . - . _ _ and energy and coordinating services; it seeks to acquire the factors necessary for the production of firm power, rather than the firm power itself. */ Thus, electric utilities
*/. The relationship of the regional power exchange factor market to the factor market for electric generating units was explained by Dr. Pace on cross examination:
Q. . . . Let's take the situation where a supplier has two ten-megawatt generators and under those circumstances can supply ten megawatts of firm power. People will buy it--I'm not asking you as an engineer as to whether that is not the case; I'm just asking you to accept that people will buy up to ten megawatts as firm power. Let's also assume that there is a market for inter-ruptible energy in the area. Would you expect that the value of the interruptible energy would be less than the value of
- firm pover? Is that usually the case?
A. Yes. Q. All right, sir. Let's say that he can sell his ten megawatts of firm power at 15 mills and his ten meganotts of interruptible energy at eight mills. Uill you accept that for the purposes of this question? A. Yes.
~
Q. All right, sir. Nou, under those circumstances, if the manufacturer of electricity can buy emergency power at a very low cost, can' t he change ten megawatts of his power supply, or perhaps-something less than that--let's say eight and a half megawatts of his pcuer supply--from interruptibic pouer to firm pcuer and thus increase its marketable value? A. Yes. He can get the rest of what he needs to make firm power. Q. All right, sir. Now is.he then in a position to go to tuo factor markets, one of chich might be GE or Westic7. house, to deter-
/- mine the cost of a third generator necessary to firm up the s_ second ten mcgouatts, or is he also in a position to go to a facter market chich cnn give him emergency power which will also firm up the second generator? [ continued on next page]
~.
that have assumed responsibility for their own power supply do not seek long term firm pouer centracts uhereby other electric utilities would take the responsibility for supply-ing their requirements. They may enter into transactions for the purchase or sale of blocks of firm power on a short-term basis, as an element of coordinating their power supply with
/ [ continued from page 67 ]
A. He has both your hypothetical, as of those alternatives, I understand it. according to Q. Yes, sir.
'And uculd both of those be factor mqrkets? ,-- A. Both of those would be sources of non-firm power, t 's factors ofUould they both be fcctor markets, markets for the Q.
production? A. Yes, I think so. Q. All right, sir. Now, if I went to Uestinghouse would I expect to get contracts for the sale of emergency,pover? ! ( A. No, you'd get a generator, I assume. Q. All right, sir. I buy a generator If I went fromto them? the Michf.gan Pool, would I expect to l i A. No. i l t Q. Uould a contract for the sale of emergency power : be substitutable for a generator? ! i I A. Yes. I Q. Would a contract for emergency power be price substitutable for a generator if one course of action would cost me five times as much as the other course of action? . A. I suppcse not. (Pace, cross, Tr. 7571-73) i i I
... . ,2:
k that of others--to alleviate temporary power shortages or dispose of temporary power surpluses; but they do not look to wholesale firm power purchases to meet their long-range power needs. Arrangements for staggered construction and joint ownership of generating units, unit power purchase, reserve sharing, emergency energy, maintenance energy, economy energy, surplus power, and short-term power--factors used in the production of a bulk supply of firm pouer--are what these systems seek in their dealings with other utilities. ~For systems whose purpose is to enter or remain in the generating business, the final product is not substitutable for the
, factcrs of production.
On the other hand, electric utilities who have chosen to engage solely in the busine; of distributing electric power seek only the final product, a supply of firm power in bulk, and have no use for the factors of producing that power--those factors are not substitutable to them for the final producq for along with those factors they would have to purchase and ccmbine a host of other factors of production: coal, turbine generators, labor, land, etc. These, when com-bined with the power exchange services would result in bulk firm power as a final product. */ Such electric utilities
*/ Dr. Pace agrees:
Q. Now in the case of a generator of firm power a. generator and seller of firm power, would emergency po,wer be a factor of production? A. Yes. But it's a factor that, by. definition,-has to i be combined in a special uay to come up with firm power, to provide anything useful (Pace, cross, Tr. 7562) . j
are neither buyers nor sellers in the regional power exchange market. That entry into the business of producing electric power may, if economically and technicolly feasible, be an alternative to purchasing a bulk power supply at wholesale does not mean that the factor markets for power production, including'the regional power exchange market, become a part of the wholesale firm power acrket, as Applicant would have the Board believe. Dr. Pace's testimony to the contrary was grounded on the premise that a " rational supplier" is always going to consider purchasing firm power (Pace, cross,Tr. 7556).
/ He thereby ignores the fact that some electric utilities desire to participate in the electric power business at the icvel of power production, either to make a return on their investment in generation or for other reasons (such as cc,-
trol over their own power supply), rather than merely engaging in the resale of power produced by others. It would not have been a satisfactory answer to Mr. Silver in Silver v. New York Stock Exchange, 373 U.S. 341 (1963), that he could purchase securities through another broker when he had the purpose of competing in the market to sell 4
- securities as a broker. Similarly, it is not appropriate in this proceeding to ignore Mr. Fletcher's purpose of making a return on investment in generation (Fletcher, direc4 Tr. 4285-7,
'( 4308-9; cross Tr. 4337), the purpose of Mr. Westenbroek of obtaining lower power costs through cooperative self-generation 70
using large units and passing the savings on to his member-customers (Westenbroek, direct Tr. 1002-3), and Mr. Brush's purpose of retaining Lansing's control over the production of its own pouer supply (Brush, direct,Tr. 2285-7). That the Applicant's withholding access to the regional power exchange market has forced some electric systems to accept long-term firm power purchases to meet a portion of . their power supply needs or to give up the power producing function entirely does not make long-tern wholesale firm power the same product as the firm pouer production factors which are traded in the regional power exchange. For those having (C the purpose of entering or remaining in the generation busi-i ness, it is cicar that uholesale firm poner is not a satisfactory substitute.
- b. The Geograohic Markets.
, The Supreme Court has also set forth the principles for defining the geographic extent of relevant markets:
[The relevant geographic narket must) both
' correspond to commercial realities' of the industry and be economically significant. Brown Shoe Co. v.
United States, 370 U.S. 294, 335-33~/ (1902) .
~[T]he ' area of effective competition in the effective line of cc=merce must be chcrtered by ccreful selec-tion of the market area in which the seller operates, and to which the nurchaser can practicably turn for suunlies . . . . Uniteo States v. ydiladelchie National Bank, 374 U.S. 321, 339 (1962).
The Department's definition of the relevant geographic boundaries for both the retail and the wholesale product m markets--the area in which it is technically and economically 71
feasible for Applicant to sell at retail and at wholesale (Wein, p.d. 71)--is in accord with these principles. The actual geographic boundaries of this area were deter-mined by Mr. Mayben following the instructions of Dr. Wein. Mr. Mayben concluded that Applicant could sell at retail and at wholesale not only in the area in which Applicant presently does so, but also in certain adjacent areas. His determina-tion of the economic and technical feasibility of service was based on the size of the load to be served and its dis-tance from Applicant's existing facilities (Mayben, direct, Tr. 2743-46). This area where Applicant sells or can rea-sonably extend its retail and wholesale sales is the geographic market in which the competitive impact of licensing the Midland units will be felt and must be assessed. It reficcts the reality of the way in which Applicant has built and conducted its business, a test the Supreme Court approved in Grinnell, 384 U.S. 563, 576 (1966) . Applicant appears generally to agree with the Department's j definition of the overall geographic area in which its retail and wholesale market power may relevantly be measured; it has contended, however, that this area should be divided j into geographic submarkets defined on the basis of the relative degree of case with which others can enter the submarkets assum-ing the continuance of Applicant's anticompetitive behavior in
'w. the power exchange market. Thus, it proposes three geographic submarkets for retail sales and two geographic submarkets for wholesale sales. By so doing, Applicant attempts to diffuse
a i and explain away the evidence of its overwhelming monopoly power in the entirety of the relevant rettd? and wholesale markets. It admits to complete dominanc- in particular "sub-markets," but argues that competition in those submarkets is precluded by natural barriers to entry or by regulatory policies, and then points to its lesser hold over the remain-ing "submarkets" to proclaim its lack of monopoly power. In advocating three retail submarkets and two wholesale submarkets, Applicant has misconceived the purpose of market definition and thus raises its barriers-to-entry arguments prematurely. Market definition is intended to produce a framework within which to measure Applicant's pouer; the determination of whether Applicant has conopoly power in any or all of the market (s) selected and the examination of how that pouer may have been exercised can only follow this pre-liminary step in the analysis.
"Submarkets" can be and have been analyzed in antitrust cases in order to determine whether monopoly may exist in an appropriate subdivision of a broad market where monopoly may not be shoun to exist in the over-all market. This of course is an entirely proper use of submarkets in antitrust analysis 1 -- indeed the Department has itself used that concept in definin~ the submarket in which Applciant has the power to raise price or limit output of pouer enchange services, m- Applicant's witness Dr. Pace has utilized the concept of the- submarket in an entirely different way. He has used it
_ _ - .- _ _ _ _ _ _ _ - _ - - - _ _ _ _ _ _ - _ - - _ - - - - - - - - - - _ - - - - - - - _ - - - - - - - - - - - - - - - - - .7 3 --
i to fragment a precisely defined market in which Applicant is , i alleged to have monopoly power throughout, and then proceeded i to analyze each submarket. We know of no cases in which an economic analysis using this novel method has been approved. J I In further demonstrating the inappropriateness of , Applicant's barriers-to-entry arguments to fracture the rele- . i vant geographic markets, we must point out that Applicant's { i arguments ignored the reality of the situation in those i markets: if the Board corrects Applicant's anticoncetitive f behavior by imposino license conditions in this proceedinc as , the Department proposes , the barriers on which Applicant relics would be substantially overcome. ! Dr. Pace testified on cross-examination that potential competition vould exist in the relevant markets if his assumed barriers to entry became ineffective: O. How, sir, you used tha term ' barrier to
' entry.' What's a barrier to entry? !
l A. It is something that makes the entry of new competitors difficult. O. If in a particular market there is a barrier to entry of a particular competitor, would l the competitor still be a potential competitor for i that market? ! I A. It depends on the height of the barrier to entry. . I l Q. I see. < Well, if there exists the possibility that the barrier can be surmounted, is it correct, then,
, to say that he's a potential competitor for that
( market? 74 i i e I
A. You're saying that if the barrier can be made ineffective, if that's a reasonable prospect-- Q. Yes, sir. A. I would think that one can say as a practical matter it's realistic to execct that if these barriers will become ineffective then he's a potential connetitor (Pace, cross Tr. 7259-7260). (Emphasis added) Dr. Pace then agreed that he could not justify subdividing the Department's geographic markets if that were the case: O. In the absence of barriers to entry would there be any justification, other than those barriers to entry, to your categorization of what the Depart-ment of Justice viewed as one market into three separate geographical submarkets? A. In the absence of any barricrs? s_ Q. Yes, sir. A. It's really difficult to conceive of, but I would suppose in theory if there were no barriers whatever there might not be a reason to separate those narhets (Tr. 7316-7317). Q. All right, sir. Now is it your testimony that in the absence of those barriers to entry you would no longer break it down into three sub-categories? A. In the presence of no. barriers to entry whatever, which I must add is, I think, totally inconceivable, in this case the answer would be yes. (Tr. 7318). , A. Again, your cuestion is, as I understand it: If this Board can overcome a barrier directly, would that be co:aething to consider in an analysis '/ of potential competition? E-75
i O. . Would that justify the change, in your view, from analyzing the areas rather than three separate sub-markets to analyze them all as one market, from a ococraphical standpoint? A. Again, I'think at the minimum you would-- Q. Yes or no, fir. Pace? A. Yes, if the Board's action climinated all barriers (Tr. 7320) (Emphasis added) One barrier to retail market entry assumed by Dr. Pace to be extraordinarily high was the pendency of a franchise (albeit nonexclusive under Michigan law) for Applicant to serve in a given area. Yet he admitted that such a barrier had been surmounted already in at least two instances: ( ' O. Well, then, isn't it corrcct that we had at lecst tuo instances [Zeeland and Lansing} where the barriers to entry in the first category were surmounted? A. Yes, we have one under what I consider to be very special circumstances, and apparently one
, o ther (Tr. 7266-7267).
IIe admitted fttrther that .a reduction in the rates of potential competitors would help to surmount the barrier to entry of even a "perpctual" Footo Act franchise held by the Applicant: Q. . . . Well, if, for any system that's con-sidering entry under the present circunstances uhere there is a so-called roote Act barrier to entry, would it be helpful to them if they could somehow reduce their costs of service, either by obtaining loans at a low interest rate, or grants, 76 =_---____-_-___-___-_--___-___-_-_-_-___________--______-_-______-_-_-________--
so-that they could sell power at a rate less than the e::isting supplier by a significant margin? . . . Under those circumstances, would the system that is considering obtaining such loan, would it be a potential competitor for a Foote Act area? A. It all depends on the height of the barriers to entry. I have set forth in my testimony reasons why I think the barriers to entry are extremely great: Q. Well, sir, suppose a system could sell pouer so that its rates uere 20 percent below Consumers Power Company's rates. Would the barrier to entry be surmounted? A. It might be. If you are assuming that they would duplicate the distribution system entirely, that they would be villing to tolerate the social i cost of that uhat is sometimes called the !
'uglification' cost of that, and so forth, possibly j
( the safety problems, and taking all these things ; into account, yes (Tr. 7270-7271). l i Q. Under those circumstances, would it have g surmounted the barriers to entry? t A. It would have decided to accept the costs associated with those barriers and come in anyway. Q. Is the answer, accordingly, yes? A. To what question? Q. To the question of whether or not it would have surmounted the barriers to entry. j A. I' suppose so (Tr. 7273) (Emphasis added.) Another of Dr. Pace's barriers was Michigan's 25% limita- l
?
tion on sales by municipal systems outside their municipal I boundaries. Yet he admitted that a lowering of municipal l 77 l l
( '
\
system rates relative to those of Applicant could create sufficient pressure for removal of the 25% limitation: Q. Assuming the lowering of municipal price relativo to privately owned companies' price would tend to remove the 25 percent limitation, would any action taken to permit municipals to lower their price in comparison uith the prices of privately owned utilities, could that be said to strengthen potential competition between municipalities and, for example, the Consumers Power Company? . . . THE UITNESS: It depends. DY MR. BRAUD Q. Well, sir, on what docs it depend? A. Well, you used, in that long question, such phrases as 'would tend to remove the 25 percent ru]e.' Hou, does that mean that it's going to (' take a 45-percent reduction in prices to remove it?
- In other words, you can't--it seems to me one can't tend to remove the 25-percent rule. It's either thero or it isn't. At least I think that's right.
And, you know, the word ' tend to' is kind of strange thing there. Secondly, you used the phrase, 'any action.' Now, it seems to me you
. could obviously set up the example. And this is what I was saying carlier. If you're going to tell me that you consider.it a commercial reality, a reasonable prospect, this law has no force.
If you're going to tell me what you really mean by the question is: Suppose I can reduce my relative prico by 1 percent, then I can safely assume that that jettisons the 25-percent rule. Then obviously the 25-percent law is not really a barrier in that circumstance (Tr. 7305-7306). Q. So would it be fair to say that things that tend to reduce the costs of a potential entrant tend to strengthen potential competition? 78
~--
A. That's fair to say if we are really in the relevant range, and again what.I mean by that is not everything that reduces cost necessarily makes that entry a greater probability. If it gets to some point where it creatcs the pressure and removes the law, then the law is gone. I don't know unat moro I can say than that (Tr. 7311) (Emphasis added) Dr. Pace finally concluded he did not know whether adding the relief sought by the Department in this proceeding to whatever existing advantages are enjoyed by municipal systems vould be sufficient to overcome his assumed barriers to entry: Q. [I]f you add up the hree cost differentials, the cost differential of the municipals by virtue of their lower money cost: I asked you if you know or had an opinica as to uhethc2 or not this was sufficient to overcome the barriors to entry. And your ansuer was that you didn't know. A. You listed three there. Q. Yes, sir. A. Financial subsidy, as I understood, was the first. O. All right, sir. Call it whatever you like. A. Then large units. And what was the third one,Iir. Brand? Q. The additional advantage was one that is existing: it would not be added by the Ecard. It's existing: the existing advantage of the municipals to be-able to sell at louer rates, b,
,- virtue of their officiency or wha' ever other cause (s- you might uant to attribute it to.
79
\
My question is: if you add the two advan-tages that might result from this Board's action to this existing advantage, would there be a suffi-cient cost differential to overcome the barriers to entry? How, it's my understanding that you've already answered this question, and that your answer was that you didn't know. But if that is not correct, say so and we'll go on from there. A. I think that is still basically a correct ansvar, sir. Q. In other words, you don't know ahether that would be sufficient to overcome the barriers to entry or not, Dr. Pace? A. Not in every case.
# CHAIR:!AU GARFINKEL: That's not the answer, k Dr. Pace.
Do you know or don't you know, in response to lir . Brand's question? TIIE WITNESS: No (Pace, cross, Tr. 7335-7336). B Y l-iR . ERAND: Q. Would the relief requested by the Depart-ment increase the probabilities of their overcoming barriers to entry, in your view? A. I can't say that it would not, but I don't know that that would be the critical difference. CIIAInliAN GARFINKEL: The question is could it? UITNESS: Could it? CIIAI:AN GARFINKEL: Yes, that's right. Could it reduce the barriers to entry? WITNESS: Your Honor, I really think that to some extent, anything that provides a lower cost can possibly contribute a little bit more. 80 Le.
. .: -w - >_. .
-~%..
CHAIRMAM GARFINKEL: To the reduction of the barriers? WITNESS: To the possibility that one would decide to enter, despite those barriers (Tr. 7356-7367). It is intereshing to compare Dr. Pace's uncertainty regarding the ability of these small systems to overcome his assumed barriers to entry with the fears of Applicant's chief executive, Mr. Aymond, that they will in fact overcome these barriers: CHAIRl'AU GARFIUKEb: . . . How do y'ou have com-petition, really, when the municipal which is ( franchised has a complete monopoly its area? Each s_. municipal has a' monopoly and you have certain--I am not saying ' improper,' now, but certain monopolics. So, therefore, does it really make any dif-ference whether someone gets a better unit price as against a second municipal? The prices are passed on to the consumer, let's say. 'Eut where is the competitive advantage? And the Board is interested in this area. THE UITHESS: The competition comes in, Mr. Chairman, in the way the customer feels about our situation. For examplo, Lansing, which is the largest municipal system, as I referred-to, is really in the heart of our service area, sells power at a considerably lower rate than can Consumers. They can do tl;at today without buying from us at below our system cost. They can do that today just with their tax and interest subsidies. Now, this makes our customers unhappy with us, and this is published in the newspapers:
' Lansing has another great year; rates are 20 percent below Consumers Pouer Company' --or whatever the percentage is. And pretty soon you find that the people in the environs of Lansing want to leave Consumers Power Company and become a part of the Lansing System. -
4 81 __ _ _ _ _ _ _
- _ _ _ _ . _ _ _ - _ _ - - - - - - - - - = - - - -
>= u
^L___ _ _ _ __...u- _- me . And the Lansing System at this very instant is seeking to have the :.au changed so that they can expand beyond Lansing without limit. CHAIRMAN GARFINKEL: But right now they can't obtain--they can't take those customers away from you, is that correct? TIIE WITNESS: Only if they--and they have done this on several occasions--only if they expand their corporate boundaries. Under the lau as it now exists, they are limited to selling only 25 percent of their sales within the community outside the community, and they are secking to have that law changed so that they would have no limit on their e::nansion. So this is one of the things ue are concerned about. (Tr. 6060-6062) (imphasis added). Mr. Aymond's testimony explaining Applicant's policy on wheeling power for small systems in its arca further illustrates this point: Q. Is what you are getting at is that you do not wish the provision of transmission services to provide the means whereby the intervenors or other municipals or cooperatives may enhance their position in terms of retail competition? CHAIRMAN GARFINI'.EL: Wait a minute,11r. Jablon.
' Enhance' their position? In what way? Is it also enhanced against Consumers Power, or what?
MR. JABLON: I had reference with Consumers Power Company , Your IIonor. CHAIRMAN GARFINKEL: All right. BY MR. JABLON: Q. In other vords, take retail customers away? A. Well, what I am concerned about is the loss of a part of our revenues while we still are. 82
burdened with the facilities that we built in order to provide service. THE WITNESS: Well, I wasn't thinking of this condition in that term. I could understand, for example, the municipality, for example, wanting to buy power at the most favorable rato; and to the extent that they meet the first two conditions and are planning to use that pouer not to pick up one of our customers, but to continue to serve their oun arca on a favoranle basis, I would not consider this condition free as [ sic. frecs?] any barrier to them (Tr. 6099-6100) (Emphasis added) . Clearly Mr. Aymond believes the ordering of an appropriate uheeling condition by this Board would free a present
~
barrier to competition by the smaller systems in Applicant's area. Mr. Aymond was also far more worried than Dr. Pace that lower bulk power supply costs for municipal systems would erode the assumed barriers such systems and potential systems face in compcting with Applicant: Q. . . . [I]f [ Day City and Traverse City) had a lower still power supply cost, would that give you a greater incentive to consider selling your facilitics? In other words, my question really is: Why is it that you made this decision to sell out in Lansing but haven't made the decision to sell out in Eay City and Traverse City? A. We have succeeded in Bay City in main-taining a good share of the business there despite the lower rates on the municipal system. Now in the case of Lansing, _the differential in rates uns greater, I believe, and our analysis 83
-e m _- -_
_ -~ . of the situation was that we.would not retain very much of the business and it would be a losing. proposition for us to try to compete with the City.. If that had been our on3y business, for example, we would have gone broke at it. We couldn't afford to compete with them. They were underselling us in the market place and no couldn't recover our costs at our standard rates and, of course, if ue lowered our rates we wculd still not be recovering our costs so we had no alterna-tive. Q. Well, if the gap had been greater, the disparity had been greater in Traverse City and Bay City, would that have affected your decision there as well? A. It very well night, because then we would lose the. business and we would have no return on our investment whatsoever, and the only thing we could do then would be to bail out and there would ~ no longer be any comoetition in the municipality. They would have all the ousiness. Now one argunent acainst our doing that is once we do that, that's an opcn invitation for every other municinality that we.scrve at retail to form their own municinal system. Q. Are you concerned with this possibility? A. Yes, sir (Tr. 6465-6466) (Emphasis added) . Q. That this could happen, meaning that your company will be forced to sell their facilities to them from the competitive pressures. A. Well, there is a lag, of course. I mean, after all, betueen the time that a community organ-izes a municipal system and the time it gets started in the business and starts taking away customers, until the point uhen we see that we are going to have to sell out to'then, that could take a period of a few years. . . . DuL it is definitely a nossi-bility, and it could hannen in certainly all of the larger communities and the cities that ue serve. (- (Tr. 6467-6468) (Emphasis acced) 84
y _ _ _ _ _ Mr. Aymond's testimony totally deflatos Dr. Pace's arguments that the relevant wholesale and retail geographic markets should be subdivided to reflect the absence of possi-bilities for competition in portions of those markets. There is simply no basis for such treatment of those markets, particularly when the evidence shows monopoly power pervading the entire area in which Consumers Power operates. The regional power exchange market by its very nature does not lend itself to precisc geographic market definition. Electric utilities uith access to this market range far and vide in scarch of useful power exchange transactions, they s are not rostricted to specific geographic limits or certain identified utilities uith whom they may deal (Mayben, direct, Tr. 2767). Applicant generally seeks to transact for power exchange services within the northern ECAR area (Michigan's lower peninsula, portions of Indiana and Ohio) and in the area of Canada in which Ontario Hydro operates (Mayben, direct, Tr. 2763). The Department has not attempted to define with precision the geographic boundaries of this entire market, for such definition is not necessary to our showing of a . I _\ 85
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Applicant's monopolization in this proceeding. */ Uc would,- instead, focus the Board's attention on a separate economic entity or submarket within f.his far-flung regional market: the arca in which power excnange services are needed by or are surplus to the electric power systems which are Applicant's actual or potential competitors in the wholesale firm power and retail firm power markets. It is in this specific area that Applicant has the power to control the price and output of pouer exchange services and is thereby able to affect the pouer supply costs of actual and potential competitors in the wholesale and retail markets there. Also, this is the ( area in which appropriate Board-ordered license conditions can be effective-in affording access to the regional power exchange to actual and potential competitors of the Appli-cant who are now denied that access. The geographic extent of this relevant power exchange submarket is thus essentially the same as that of.the relevant wholesale and retail markets discussed.above.
*/ Applicant's Dr. Pace testified on cross-cxamination that it was not necessary from an economic point of view to define market boundaries with great specificity to find monopoly power if it could be established that someone had the power to exclude another entity from that market (Pace , cross, Tr. 7687) -- e::actly uhat the Department has established in this proceeding with regard to Applicant and the entire regional pouer e:: change market.
Applicant's counsol' attempted to characterize Dr. Pace's answer as ambiguous and proposed to clear it up on redirece examina-tion. IIis redirect, however, failed ta bring up this point
-(, (Id.).
s_ 86
_m _
-.- __ m_ . . , . _ - ~ _ ,
m
- 2. There is Substantial Evidence of Applicant's Intent to Monopoli=c the Idiolesale Firm Power and Recail Firm Forer Harhets.
The Department 's showing that there is a " situation inconsistent with the antitrust laws" has focused upon the manner in which Applicant has used its dominance in regional bulk power supply and its control ever the regional power exchange to prevent or forestall the development of effec-tive competitors with it at the wholesale and retail levels. An important part' of the Department's case involves tracing the history of Applicant's relationship with the smaller competitors and would-be competitors in the area. A sub-sequent section of this brief will examine the bulk power ( supply and coordinating arrangements which Applicant has entered into -- or refused to enter into -- with these systems. If these relationships ucre examined in isolation, there could be room for some argument as to what they show: trdnsactions or negotiating positions which we might regard as demonstrating a monopolistic purpose on the part of Applicant might be contended by it to involve nothing more than legitimate efforts to protect the financial position of the company. In this case, however, the Board's fact-finding job has been made much easier by the existence in this record of documents prepared by Applicant's officials and taken from Applicant's files which reveal with complete clarity its motives and ultimate purposes in its consistent 87 L_
~ . . . _
l L pattern of dealing with these smaller systems. Considering the evidence of Applicant's actual conduct in the light of the documentary " intent" evidence, the Board is bound to conclude that Applicant has consciously sought to monopo-li e the regional bulk power supply. The growing scale of the M-C pool was viewed by Applicant with increasing concern as a serious competitive threat since it would permit its competitors to install larger and more economical generating units (D.J. Nos. 173, 189). Thereby they could avoid the necessity of purchasing btilk power supply from Applicant, as did Petoskey, or of selling their entire utility t.o. Appli-cant, as did Allegan. Mr. R. L. Paul uss Applicant's stcff man in charge of coordinating its competitive policies. A speech given by Mr. Paul to an audience of company engineers explained the critical importance to Applicant of preventing the expansion and increased effectiveness of the M-C pool:
. . . shown on the map in red, is the interconnected system of Northern Michigan Electric Cooperative and Wolverine Electric Cooperative and the municipal plants with which they are interconnected. Although
~
relatively small today, by comparison to our system, you can see that the extent of the system is consider-able. As indicated earlier, the cooperatives are also doing everything in their power to extend the system even further. It is the nrovine cvstem that presents the real problem to Consumers Pouer Company because the system is not only cupifcating our system but is uttemptina to achieve a comoeti-tive indenendent cower source. (D.J . iso, luo, p. 5) (Emphasis addect) 88
Applicant attempted to explain away D.J. No.188 as being Paul's own frolic and not representing Applicant's policy (Paul, cross, Tr. 8244-45). While Paul testified he had not shown the speech to others, he finally admitted after his recollection uas refreshed with D.J. No. 274 (rejected) * / that his " views concerning this growing interconnection as a competitive threat were widely cir-culated among all management personnel of Consumers Power Company "(Paul, cross , Tr. 8264) . This took the form of an internal memorandum stating that the continued expansion of the two generating and trancmission (G & T) cooperatives
<- in Michigan (Northern Michigan Electric Cooperative and
( - Wolverine Electric Cooperative) poses a serious threat to Consumers Power Company and should be "of considerable con-cern to all of us." (D.J. No. 186) Although Applicant's chief executive Aymond specifi-cally denied that it was Applicant's policy to acquire all competing systems (Tr. 6064), the documentary evidence clearly shows that Applicant did pursue such a policy and that it was closely related to the objective of forestalling the development of competitive bulk power supply systems. Thus Mr. Paul' (who Mr. Aymond conceded was part' of the
*/ D.s . No. 273, which refreshed Mr. Paul's recollecti on 151i that score, was rejected. The Department had overlooked, however, that the document was already admitted as D.J. No. 'n 186.
89 1
L __ _ ___ _ ._ m - -
= - - -
management team) in his talk to his fellow engineers had taken it for granted that Consumers' staff engineers knew what Applicant's policy was : Acquisition of Other Electric Systems. The first goal of our Marketing activity or program concerning other utility systems in our service area is, of course, to acquire these systems. (D.J. No. 183) (Emphasis added) Mr. Paul went on to outline the action taken to imple-ment this policy, citing several examples, including an offer to purchase or to lease systems or to purchase s'treet lighting systems of Grand Rapids and Wyoming (D.J. No. 188). jlf Judge Clark'put to rest the dispute as to whether or [_ s not Mr. Paul's speech accurately reflected Applicant's policy by a series of questions at Tr. 8267-8, culminating in: Q. Then is it fair to assume that if you tell other people in the company that such and such is the pplicy, you believe that is the policy enunciated by your management or approved by your management? A. Yes sir. Applicant recognized that by selling wholesale power to competing distributing systems it may well in some instances be supplying them uith power at below the cost that they would themselves obtain by self-generation from small units. It appears from documentary evidence that it viewed this as the lesser of two evils--that the real danger was their
/
(_, */ Mr. B. G. Campbell, Applicant's then marketing vice-president, in a memorandum to A. II. Aymond, had anticipated that purchase of the Hyoming system "will eliminate another potential municipal competitor." (D.J. No. 111)
,w-J \
achieving an independent power supply. , Although these (wholesale sales) represent a small portion of our total electric business, the assoc 4.ated problems and their relationship to the future welfare of our Company are extremely impor-tant to all of us. In this phase of our business, we are in the position of perpetuat ing the existence of the municipal plants and the REA's which could be-the nucleus of greater public power systems yet to come. Yet, if we don't do business with them, we may be forcing their more raoid concoiioation and exoansion. (D.J. No. 168, p. 1) (Bracketed material supplied from previous paragraph; emphasis added.) Mr. Paul confirmed the corollary on the witness stand: Q. Did you believe that by doing business with them you could reduce their rapid consolida-tion and expansion or lessen such consolidation and expansion? l * *
- A. Yes. I would answer-yes. (Paul, cross ,
Tr. 8034 ) In direct testimony Mr. Paul denied that the fact of retail competition influenced Applicant's wholesale policies in any way (Paul, direct ,Tr. 7895) . Compare this statement with Mr. Paul's remarks to his fellow engineers above and the following from D.J. No. 187, a March 20, 1970, internal memorandum from Mr. Paul to his superior discussing alterna-tive courses of action by Applicant, one of which might effect a lower cost of wholesale power for distribution cooperatives. Although we could supply the distributing cooperatives directly with wholesale electric energy at a cost significantly below that now paid to Northern Michigan and Wolverine for this pcuer, contractual arrangements and other problems (~ - make it extremely difficult, if not impossible, to disassociate the distribution cooperatives from their G & T suppliers. 91
Paul supported his recommended course of action on the ground that: Although it uould improve the position of the distributing cooperatives, it would hopefully elimi-nate future increased penetration or influence of public power groups in our service area. (D.J. No. 187) Applicant 's monopolistic intent is revealed with par-ticular clarity in the internal documents which explain why Applicant was willing to enter into a limited coordination arrangement with the City of Holland. Its purposes were to preclude or limit the coordination opportunities of others. In the case of Holland, Applicant's marketing people, R. L. Paul, W. J.11osley, and R. A. Conden, met with Mr. A. H. . ( Aymond to discuss a new interconnection contract with the City of Holland. They briefed Mr. Aymond "on our present negotiations in trying to sell Holland supplemental power in lieu of installing additional generation. It was pointed out that we have been unsuccessful and the City is committed to a 28,000 kw addition to be put in operation in late 1967 or early 1968." According to the memorandum (D.J. No. 150) written of this meeting by Mr. Conden to his su'perior in the marketing department, gir. B. C. Campbell: , We then recommended to Mr. Aymond that a new inter-connection agreement be negotiated with the City of Holland. Our prime reason being that 11 Consumers d_d not maintain this interconnection e .douoteoly the City and Wolverine Electric Co-op e:diln enter into such an arrannement, s_ 92
2 =-+___ =- - -- f Mr. Aymond agreed that it was to the Company's benefit to maintain the interconnection and auth-orized us to negotiate with the City of Holland . . . . (D.J. No. 150) (Emphasis added) Applicant's engineers had evaluated the effect of the prospective M-C pool interconnected system on the unit sizes that could be installed following interconnection: When attempting to determine the effect of a combincd operation of these two systems, we can only estimate because detailed operating costs are not known to the writer. Houever, there are some basic benefits to be derived from combining two or more pouer systems . ... (D.J . No.173 ) Mr. Conden (R. L. Paul's superior in Applicant's marhat-ing department) foresaw these benefits as: climination of diesel generation through better utilization of Northern Michigan's advance steam plant which would also benefit from the better capacity factor; more easily meeting forced outage and maintenance requirements; and
.When new generation is required, a larger and more economical plant could be installed, thereby accomplishing a savings in first cost as well as operating cost. (D.J. No. 173)
In addition to successfully heading off a Holland-Wolverine (and hence M-C pool) interconnection, Applicant's officials also evaluated the " dangerous" possibility of an interconnection between Allegan (with which it was in door-to-door retail competition) and Wolverine. The subject came up in correspondence betueen Mr. Paul and his colleagues discussing uhether a small substation at a to-be-abandoned (_ 93
-_m. _ _ ,J
(. small hydroelectric site should be used as a distribution system for Applicant's system in Allegan or instead sold to the City of Allegan municipal system. By thus reducing our cost to serve, we might be in position to offer to the City a proposition that will eliminate the danger of the City making a connection with Wolverine Electric Cooperative. (D.J. No. 178) In response to an invitation to submit a proposal to Allegan for emergency supply, Applicant instead proposed a firm power arrangement and suggested alternatively that Allegan sell its system to Applicant (D.J. No. 179). In making the firm power proposal, Applicant carefully evalu-ated the costs to Allegan of going forward with the Wolverine interconnection. (D.J. No. 180) (The Department's showing of Applicant's intent to monopolize the regional bulk power supply might have been even-stronger had the Board not denied our discovery into Applicant's prolific and continuing efforts to influence action by agencies of local, state and Federal governments. This denial of dis-covery apparently was premised upon an unwarranted extension of the doctrine of Eartern Railroad Presidents Conf. v. Noerr Motor Freight. Inc., 365 U.S. 127 (1961) and Unitc Mine Workers v. Pennington, 381 U.S.157 (1965) . The doctriac of those cases
~
would preclude a finding of antitrust violct on based solely upon evide :e of legitimate efforts to infl. : nce governmental 94
w _ _. . __ _ _ _ _ _ action, no matter how anticompetitive the purpose. It does not, however protect " sham" attempts to influence government. Noerr, 365 U.S.129; california Motor Transport Co. v. Trucking Unlimited, 404 U.S. 508 (1972); Otter Tail Power Co.
- v. United States, 410 U.S. 366 (1973), U.S. (42 U.S.L.W.
3651) (1974) . Nor does it preclude the introduction of evidence of attempts to influence government to show the purpose and character of other conduct on which a charge of antitrust viola-tion may be premised. Pennincton, 381 U.S. 657, 670, n. 3. These substantial e::ceptions to the doctrine would seem clearly to mandate that Applicant's claims of Noerr-Pennincton immunity be examined and judged against a background of facts, rather than granted automatically without further inquiry. The facts, of course, must first be discovered, and to deny their discovery thwarts, rather than promotes, application of the Noerr-Pennincton doctrine. The United States District Court for Middle Louisiana uphcid the Department's right to such discovery of a similar fact situation, in the only case in point of uhich we are aware. Gulf States Utilities Co. v. Kaucer, Civil Action No. 71-102 (Antitrust & Trade Reg. Rep. No. 583, p. A-ll, October 10, 1972, citing case as Gulf Staten v. McLaren) . Two Atomic Safety and Licensing Boards have donc likewise: Alabama Power Company -- Farley Units 1 and 2, AEC Dkt Nos. AEC Dkt. Nos. 50-348A and 50-364A, Board Order of November 1,1973: [W]c are not prepared to say that all activity in this arca is protected from scrutin r or that documentary material relating thereto is protected from discoverv. That, in our view, would amount to a privilege more pervasive than the attorney-client or doctor-patient privilege. We regard as frivolous Applicant's further argument that, should it be required to produce the documents in c,uestion, it
7- will have a " chilling effect" on Applicant's First Amendment right of petitioning its government (pp. 3-4). Louisiana Power & Light Co. -- Waterford Unit No. 3, AEC Dkt. No. 50-382A, Board Order of April 19, 1974. In overruling this objection, the Board does not foreclose any argument Applicant may wish to make at the time of hearing with respect to the protection to be afforded these activities. The fact of the activity, if any, is, however, subj ect to discovery. No First Amendment threat is perceived in receiving evidence as to the occurrence of joint legislation or judicial activitics. Indeed, con-sistent with the First Anendment, such activities should not be hidden from scrutiny. [T]he doctrine and the extent of the doctrine's coverage cannot be tested in a specific. context without the proper development -of evidentiary (~_ i facts. That is to say, that although Applicant might claim cntensive immunity on the asserted applicability of the doctrine, the immunity ultimately determined may be substantially narrower than that claimed. Uithout the develop-ment of a factual basis upon which to consider the doctrine, there is no way for the trier of facts to gauge the scope of the immunity. [W]e note that it cannot be ascertained presently which activities Applicant itself may claim to be immunized by the doctrine; and, surely, the other parties are entitled to know the factual bacis upon which Applicant will approve the applicability of the doctrine. It would be most unfair if a party, merely by citing the catch phrase "Noerr-Pennington" could thereby I relieve itself of the responsibility of producing data in response to diccovery which data might be outside of the scope of the doctrine (pp. 7-9).) l 96
_(-
- 3. Applicant has the Power to Grant or Deny Smaller Systems in its Area Access to the Regional Power Exchange In an unregulated industry, establishing significant economic control over the supply of a product (or demand for a product) would be, without more, sufficient to establish the existence of " market power." In a regulated industry such as the electric power industry, it is also necessary to consider whether there is a valid scheme of governmental regulation which restricts the exercise of monopoly power. Applicant's market power over supply of and demand for power exchange services is shown h:re in two subsections (1) demonstrating its physical and economic control over the relevant markets and (2) estab-lishing that no federal or state public utility regulator has the authority directly to restrict the excrcise of Applicant's market power over the supply of and demand for power er:hange services.
Applicant, through its economist, Dr. Pace,- has also contended that federal and state regulation of rates and service in what the Government has established are other relevant markets, namely, the wholesale firm power and retail firm power markets, is sufficient to eliminate any abuses resulting from the exercise of its private discretion in the power exchange market. We believe that Congress has already answered the question whether state and federal commission regulation of the wholocale firm power and retail firm power markets obviates the antitrust concern about abuses in the ( power exchange market. As we demonstrate in a third sub-section, revicwing the legislative history of section 105, Congress expressly determined that antitru ut enforcement was
f . needed as a supplement to regulation,
- a. Physical and Economic Power It is undisputed that Applicant's massive generation and transmission system spans and dominates the area of the relevant wholesale and retail firm power markets.
Applicant's generating resources consist of thirty plants with a total capacity of approximately 5,363 mw (as of December 31, 197.3) . */ Those generating plants are integrated into a bulk power supply system'and that system is interconnected with the bulk power supply cystems of major neighboring electric utilities through a network of high voltage and extra-high voltage (ehv) transmission lines. Applicant operates apprcxi-
,_ mately 9,064 circuit miles of transmission, including approxi-( mately 1,422 circuit miles of 345 kv and 3,339 circuit miles o f 138 kv. **/ That this transmission network blankets the relevant market area is evident from D.J. No. 1, the FPC's map of electric facilities, on which Applicant's tranc-mission lines are shown in green. Also, under the Michigan Pool agreement, Applicant makes use of the transmission system of Detroit Edison (shown in magenta on D.J. No.1) to gain i
i
*/ Applicant's genera ing plants were described above at page 14 . 'See D.J. No. 223(A), page E-18.
! **/ Applicant's transmission network was outlined above at page 15 . See D.J. Ho. 228(A), page E-21. 98
u ._ _. _
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g. access to the bulk power supply system of Ontario Hydro in Canada. The remaining high voltage transmission facilities in the market area pale by comparison with those of the Applicant. The Northern Michigan and Wolverine cooperatives and the Traverse City and Grand Haven municipal utilities are inter-connected with a transmission system, including approximately 40 miles of 138 kv operated at 69 kv, with some additional 138 kv proposed (D.J. Nos. 18, 20; Steinbrecher, Tr. 1135). This system is comprised principally of 44 kv and 69 kv transmis-sion and is by nature of its low voltage sufficient only for
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small scale coordination (Wolfe, cross, Tr. 1712, 1727-29). Also
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it reaches but a small portion of the relevant market nres . It does not entend, for example, to Lansing, Alpena Power Co., Bay City, Southeastern Michigan Cooperative, Detroit Edison, AEP, Toledo Edison, NIPSCO or Ontario Hydro. Lansing has 27 miles of 138 kv transmission tying its system together and interconnecting with Applicant, Alpena Power has 11 miles of 138 kv transmission serving similar purposes, and certain other municipal systems have minimal transmission of 69 kv or below within their own creas. In stra, Applicant has approximately 9G% of all high voltage transmission of 138 kv and above (including 100% of the extra-high voltage transmission); it operates the only existing transmission t network that covers the relevant market area and provides l access to bulk power supply systems beyond the area. I i
__, f. . _, _ I 1 7 Applicant's present monopoly control of transmiss, ion La a ! wide area of the lower peninsula is, as Professor Wein explained, the result of its acquisition over a sixty-year period of many separate localized, independent utility com-panies, private and public. In the early decades the typical electric company was, therefore, vertically integrated and operated uithin individual towns and cities. The economies of larger scale generation made possible by inprovenet?t in transmission technology could not be achieved by these numerous smaller vertically integrated com p s operating within the confines of smaller cities and towns, since the growth of these towns were not rapid enough to exhaust the economies inherent in large scale generation equipment; and unless interconnection was achieved, the largest generating units could not be inctalled due to high reserve requirements for firm power, even if a particular town could support the largest ( units. A method (consistent with the great merger trends of the late 19th and early 20th century in many sectors cf industry) to secure the interconnec-tiens of many . separate geographical markets was the merger or purchase of assets of the smaller verti-cally integrated local electric utility companies-- private and public. There followed a frenetic merger and acquisition program from the earlier years of the first decade through the twenties, and thirties. It
" has not yet ceased. The enistine large svstems cuch as Concumers Power are the resuits or euen mercers and acouisition. nursued by astute cno rar si"ated men wno not onlv recocnized the innerent ecencaies of larne scale nenerncien ano trancniscion anu attenuant prorits, but also encu neu to ceveico anu attain tne linancial connections unica nace tnese aconicitions possible. 'incy recogniceo, earlier enan otners, tnat the key element in obtaining these economics was the interconnection of many separate geographic markets selling retail power, i.e., the interconnection of many separate distribution systems. /
The merger or acquisition of assets of smaller private and municipal systems was the predominant method of pooling loads of separate geographic markets. The giant electric utility companies of 100
/
today which are vertically and horizontally inte-grated emerged through these acquisitions, and one of the consequences was the elimination of potential
, competition. (Wein , p . d . pp . 51- 2) (Emphasis added) _*/
_/ D.J. Nos .16 and 17, further illustrating Applicant 's past history were erroneously rejected by the Board. The proceeding before the Board is in the nature of a Sections 1 and 2 proceeding under the Sherman Act. In Section 2 cases courts invariably consider it necessary and important to have before it at least in outline form some history of the particular company involved, and some indicotion as to the movement of the industry of which the company is a part. See F.T.C. v. Cement Institute, 333 U.S. 683 (1948); United Mine Workcrs v. Pennington, 381 U.S. 657, 670 n. 3 (1965); lndensneent Taxica o unerstors ' Ass 'n v. Yellow Ceb Co. , 278 F. Supp. 9/9, $69 Gl.D. Cal.1968) . In U'n ited States v. Aluminum Co. of America ,148 F. 2d Fed 416 12c Cir. 1940) the court rounc it necesserv to discuss Alcoa 's grcuch since 1888. In Americen Tobecco Co'. v. United States, 328 U.S. 781 (1946) the statute or limitations pre-f- cluded prosecution of the defendant for more thsn the 3-year (~ period proceeding the filing of the information. But the Supreme Court said that "some history and development of the cigarette industry is essential to an underptcnding cf the monopolization cherge (328 U.S. 781 at 790) cnd discussed the dissolution of the old tobacco trust in 1911. In United Stctes v. United Shoe Mechinerv,110 F. 2d 295 (D. Mass 1953) citd per curica 347 U. S. 5fE T1954) the court found it essential to discuss transactions in 1899. In United States
- v. DuPont, 351 U.S. 377 (1956) concerning a 1947 complaint charging monopolization of celloph.:ne, the Court set forth the factual background as far as 1900. In United States v. Grinnell Corn., 384 U.S. 563 (1965) a proceecing' basea on a 1961 cnarge of monopoli:ation, the Court found it necessary to discuss 1906 and 1907 agreements. The courts have consistently allcwed historical background evidence to be introduced because a monopolization does no commence on one particular date; it ordinarily is the result of market pmeer acquired by a series of actions over a period of time which cummulatively give the monopolist his market power.
We therefore submit that the Board should consider rejected D.J. Nos.16 and 17 for the sole purpose of having a his-torical understanding of the development of the " situation inconsistent with the antitrust laws ," even though it may choose to disregard the same evidence in determining ubccher the activities under the license vill maintain the said situation. 101
l Mr. Mayben, the Department's engineer expert in power supply planning explained the essential role high-voltage transmission plays in the integration of electric systems and in the coordination between electric systems, including reserve sharing arrangements, coordinated development, and wheeling (Mayben, direct,Tr. 2565-2566, 2580, 2649-2650, 2735-2738). Thus, Applicant uses its trtnsmission network not only to integrate its oun far-flung bulk power supply system (Wein p.d.,51, 52) * / but also to coordinate that system with other large systems so as to reduce its cost of producing a firm bulk power supply. Applicant's transmission network is the means whereby it is enabled to engage and does engage in sales, purchases cnd exchanges of various kinds (- of power and energy and services--factors of production--in the regional power exchange market. The advantages Applicant obtains from participation in it were described in some detail already in this brief (supra, pp.26-3) They include decreased reserve requirements, the ability to use larger, more economic generating units, and the coordinated planning and operation of transmission facilities--all result-ing in substant:ial cost savings. D.J. No. 65 indicates Applicant's reserve requirements were to decrease from 25% 6f peak load to 12.5% as a result of its coordinating transactions l l with Detroit Edison, Ontario Hydro and the Illinois and Indiana systems, and that the Ontarior Hydro and Illinois-Indiana (" t
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*/ Further detailed by D.J. Nos.16 & 17 (rejected) .
102
coordination would save $13,600,000 annually. D.J. No. 70 (p. 9), a 1961_ study, estimated annual savings of the Applicant-Detroit Edison coordination at $16,924,000. In that regard, Applicant's vice president, Mr. U Jack Mosley, testified that "the bulk power supply of Consumers Power Company is made available to its customers at a lower cost and with better reliability because of these interconnections than could be done under any other alternative" (Mosley, direct, Tr. 8516) and, further, that "the reason we have [interconnec-tions] are for two reasons: to onhance the stability and reliability of our system; and, as an economic thing to do in the develcpment of our power supply" (Mosley, cross,Tr. 8652). Just as Applicant's transmission network enabics it to take part in and benefit from the regional power exchange, it is also the key to participation in that exchange by the smaller private, municipal, and cooperative electric systems in the relevant market area. Mr. Arthur Steinbrecher of Northern Michigan Cooperative, testifying on behalf of the Municipal-Cooperative Pool (whose systems range generally along i the western edge of the market area) expressed the Pool's f policy of seeking coordination with other systems whose facilitics it could reach (Steinbrecher, direct, Tr. 1217). _ He then explained the crucial impact Applicant's transmission has upon the M-C Pool's opportunities for such coordination: 103 i
k Q. Are there any impediments, or have there been any impediments to programs of coordinated operation and planning by the Municipal Cooperata.ve Pool? A. Yes, very serious impediments. I'm sure you all are aware of the geograpny of northern-Michigan, where the area in which northern Michigan and the pool group operate, we are isolated to the east and west by water Which is a very effective barrier to relationships, power supply--power relationships with systems to the east or west. Q. Do you have any opportunities for coordina-tion other then--or opportunitics which do not recuire cooperation of Consumers Power Company? Perhaps you could refer to D.J. No. 1, uhich has already been received into evidence. It's the very first exhibit, Which is the Federal Pcwer Commission any of trans-mission facilities.
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A. Well, our problem there is one of economic feasibility to reach the systen of the affiliate of
' the American Electric Power Ccmpany, which has facil-ities in the southuest part of the lower peninsula, and to move substantial quantities of power vould require very heavy investments in transmission facilities. That s lihewise true with access to the facilities of the Detroit Edisen Company opera-ting in the southeast dnd eastern portion of the state.
Our access to other power suppliers, our economic access to other major suppliers, must be via the facilities of the Applicant. Q. What facilities of the Applicant are you referring to specifically, Mr. Steinbrechcr? A. Well, what I think we would classify as the high voltage facilities of the Applicant which are its 158,000 volt transmission system, and its 345,000 volt transmission system. (Steinbrecher, direct Tr. 1217-19). Representatives of other smaller systems in the market area also testified to the tremendous L portance of Appli-cant's transmission as a means to obtaining lower pouer costs through coordination: 104 _ _ _ _ .
sw y. ( Mr. Stephen Fletcher,_ p. resident of Alpena Pocer Company (located'in'the northeastern part'of~the"marEct area): Q. Have you considered coordination as an - alternative source to supply pc.<cr to your system? A. Coordination--the coordination arrange-ments that stand in IIichigan today preclude us from being involved, inasmuch as the reserve requirements even for the IGIPP group are simply out of our reach. We only have a very small portion of our own generation, and absolutely no reserve. Q. If you were able to overcome these obstacles, would there be any other impediment to your coordi-nating with other systems, systems other than Consumers Power? A. The primary problem for small utilities located in northern liichigan in terms of coordina-tion, is the lack of any transmicsion facilities f' available to us in order to actually nove blocks of power around so we can coordinate (Tr. 4330-4331). Q. If you had access to Consumers Power's high-voltage transmission system, and they did, in fact, provide wheeling services for you, vould your alternatives for planning your load growth be increased? A. Well, certainly, we'd be able to, if we had--this is the primary problem of the small group that we have Daverman doing is: if we do get together and plan load growth in l'orthern Michigan, hou do we get the pouer to the ultimate consumer, not having any transmission service at thi time? So if we did have access, we would have the alternative of going in with a grcm of smaller utilities or, I suppose. if ue actually had true honest-to-gosh wheeling services, that ne could go e to forDetroit Edison, uholesale I &(Tr. power M, 4333-4334 anybody,)and
. ask them 105
i Mr. Harold Munn, president of the Coldwater Board of Public
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Utilities (located' 'in the fa.r southern par't of 'the market area): Q. One of the proposed license conditions submitted by the Joint Intervenors in this pro-ceeding is wheeling or transmission services over Applicant's transmission network. Is the inclusion of this provision important to the City of Coldwater? A. Oh, I consider transmission vital to our future operation (Tr. 4073). The Witness: . . . Wheeling is important because it would enable us to deal in the market-place for blocks of energy. For example, wheeling would permit us to go to utility systems that are interconnected with. Consumers Power at this time, such as--I believe there is some means of interconnec-tion between Indiana-Michigan and Connumers, and certainly with Detroit Edison and through Detroit Edison to Ontario Hydro. There is interconnection with the City of Lansing; there is interconnection with the City , of Hollanc. There are certain of these plants which have excess capacity. We would like to contract for a block of that energy. (Tr. 4073-4074) . CHAIPleN CARFINIGL: Mr. Munn, in order to expand on your answer, how would it help you, this extra wheeling? c THE WITNESS: Because we believe we would be ' able to purchase in the marketplace at a lower unit cost, and even after paying a compensatory amount for the wheeling, that the energy would cost us less delivered at Coldwater (Tr. 4074) . I Q. Would it be economically feasible for the City of Coldwater to enter into such joint arrange-ments as construction of a joint nuclear facility or a jointly owned steam facility with any other l l 106 l
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__m system, other than Consumers Power Company, absent wheeling over the Consumers Power Company network? A. Well, in my opinicn, based on the data that I have seen, it uould not be feasible for us. We have to get the wheeling over the transmission net-work that exists (Tr. 4075) . Mr. John Keen, manager of Wolverine Electric Cooperative (located in the central western part 'of ths market area):
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Q. Now, why do you feel that access to wheeling services from the Consumers Power Company , is necessary to your system--and when I say 'your system,' I refer to the Wolverine Electric System, sir? A. For several reasons: one is to eliminate wherever possible duplicction of transmission facilities.
,- Number two, to be able to nahe purchase
( and sale arrangements, economy power, and so forth, with other utilities, other than Uciverine itself and Censumers Power, itself, perhaps. Q. Is access to Consumers Power wheeling service an important element of either present-day or future coordination attempts by your system? A. Very much so. i Q. Could you explain that, sir? A. Yes. We hope to someday be co-partners with Consumers in the Midland no. 1 and No. 2, or some other plant in the future. Without vheeling we would be unable to have any power flowing through our system frcm Midland No.1 or No. 2, or another plant to be built in the future. We could not make arrangements with other utilities such as I & M, Detroit Ediscn, or the City of Lansing or some other utility without wheeling arrangements. (Tr. 4511-4512). Mr. Earl Brush, general mnnager of the Lansing Board of Water and Light (located in the central part of the market area): subc-
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-. wn _.
[\ Q. . . . Is there any form of power exchange service that might be available fran this case that uould be of use to the City of Icnsing in connection with the bulk power supply expansion program? A. Well, as I understand the case, there is a question of wheeling. Q. Yes, sir. A. If the City of Lansing is to ever partici-pate in nuclear power we are going to have to have the benefits of tiheeling. The municipals--We are too small, as an individual municipal system, to build a nuclear plant. Our information is that 500 mw and up, or maybe 500 mw is the smallest size that is economical to consider. . With our load we could not afford to build, or justify building that large a unit. Our effort in the nuclear field is tv work with some presumably investcr-owned utility ( -- to own a share; and ne have so asked Consumers to consider us in their Quanicassee plant, in writing. Part of that request was wheeling, part of the request was an operating agreement covering the jointly owned facilities. So we, as well as the rest of the municipals, to ever' participate in nuclear power, are going to have to have wheeling arrangements. Otherwise it's going to pass us by (Tr. 2292-2293). Q. Mr. Brush, does the [ Stanley Engineers] study includeaspurchases Consumers from parties other than an alternative? A. No, sir, it does not, because we have no contractual arrangements with anyone else.
- Q. Why didn't you have any contractual arrange-ments with anyone else?
i l A. Uell, we butt up against Consumers Power in our service area-- l 108
-_ - - - - =
. : _ a - ._.~ -
f \- . . . . . The nearest transmission line to us of another generating utility is some 15 miles due west of us. It's the Wolverine G & T. And Detroit Edison is a considerable distance from us, and we have no Wheeling capacity at the present time to interconnect with anybody else (Tr. 2333-2334). Mr. Joseph Wolfe, former manager of the Traverse City municipal utility (located in the northwestern part of-the market arca): Q. . . . Mr. Wolfe, you previously testified that one of the alternatives that you considered for planning your load grouth While you vere director - of power and light at Traverse City uns purchasing power from sources other than Consumers Power. Is that correct, sir? A. Yes, sir. Q. From whom did you consider purchasing power?
^
A. It was considered, but not in a formal uay, purchasing power from Indiana-Michigan Electric, uno had Wholesale rates that were less than Consumers Power Company. It was considered purchasing power from the City of Lansing, who had power available. It uas considered to purchase power from Detroit Edison, perhaps others. But When I say considered, this was not done in any active way because of the immense hurdles that would have had to have been overcome to actually realize such a purchase. In other words, we evaluated all the imoedi-ments and decided that they vere too great to ov'ercome. Q. Could you explain to me what these impedi-ments consisted of? A. Any viable or any reasonable ray of deliver-ing this power to Traverse City from r iremote source would have to come over somebody else s transmicsion system. The transmission system of tLe cooperatives might have been useful for this purpose, but only insofar as it was capable of handling chase power deliveries, and its system was not designed during that period of time to hsndic any larr.ur power trans-fers than What it probably could reacenably--would 109 . .
. ,_ _ .w _ _
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reasonably need for itself. So that that would ccan that either very large transaf.ssion facili-ties would be involved to upgrade the cocoerative's transmissicn system or the transmission s4stea of Consumers Power Company would have to be u 'tiliced. And this did not appear to be a method ifnich could be accomplished due to the expressed attitude of Consumers Power Company during negotiations and discussions that were held with them (Tr. 1726-1728) Q. k~nen you were in Traverse City, Mr. Wolfe, and in planning your system growth, why didn't you consider building your own high voltage transmission system so you could take advantage of the third party alternatives? A. The third party alternatives were so far away that the cost of building trcnsnissica facilities would have'been prohibitive (Tr.1729) . Mr. Maybcn's expert testimony confirmed the views of these system nanagers and policynahers regarding the market power Applicant's transmissien systen affords the Applicant to deny those systems access to the regional power exchange. Mr. Mayben had nade no studies of power supply fccilities in Michigan, but was able, on the basis of cany studies he had conducted in other parts of the country, to assure the Board that the M-C Pool could not install a nuclear unit without access to coordination with other systens through high volt-age transmission: Q. have you ever represented a small utility bargaining for coordinatien with a large utility, where the latter utility had cunership of much or all of the transmission lines, the high voltage transmission lines surrounding the area of the scall utility? A. Yes, I have. '( Q. I see. And did that factor have any effect on the bargaining? i
_ _.m . - _ __- - _= __ _ - _ - - _ _ _ i A. Well, definitely the first step is to gain
'the ability to utilize the intervening trcnsmission system, and that uns the first item of negotiation.
Prior to that, it uns rcther useless to go to the other utilities who might be in the regicncl market cnd seek a source, because without a way to move it to e particular utility -- and again in the instance I'm citing, it was just not economically or techni-cally fecsible to construct the kinds of facilities necessary to interconnect that system. Q. On the map it shows Lake Michigan and Lake Huron surrounding the lower peninsula. Would these bodies of unter, the presence of these bedies of water, have any effcet cn opportunities for coordi-nation? A. Well, yes, in my judgnent, it would mean that coordination of a small system Who might be in the center of the lower peninsula would really have to be sought uith utilities Who are to the south. These bodies of water constitute a natural barrier
< to trcnsmission line, except for those which cross I at, I belive it is, the M rkinaw Straits, if I recall my gecgraphy.
Reclly, the principal coordination cpportuni-ties are to the south -- encuse me -- possibly to the east with Ontario Hydro also. Q. In your view uould it be possible for the MC Pool to utilize nuclear power generating units without cecess to a regional pouer exchcnge? A. Well, sgain, Mr. Brand, I have not studied the MC Pool's power supply progress. I only have a brief familiarity with what their load level is and what generating units are in service, but my judg-ment is they just are not sufficiently sized, nor do they have sufficient existing generation to expect to install the kind of nuclear capccity which is feasible and yet plcn to maintain reliable service at a lou cost without coordination (Mayben, direct Tr. 2769-2771). On cross-examination, Mr. Mayben elaborated upon this point. ( Mr. Ross, maybe I can answer your question
' uith a certain qualification. I believe your question was what forms of coordination would be required
,, _ _ .,.i.-a _ . _ ., _
t - for this intervenor group [M-C Pool, Holland, Coldwater and Lansing] to be able to install a 500 [rme power plant], and I wcn't pass any judg-ments with regard to uhether or not 500 is an appropriate level or not. But again, one of the forms would have to be reserve sharing and mutual support, not only among themselves but uith the regional utilities to which they could effect interconnections. Again, with a unit that large, coordirated maintencnce scheduling and maintenance service would be important. I think when units get that large, certainly cconomy energy transactions vould be a form of coordinated operation that I would like-to see because they-may have some substantial low-cost energy-producing capability. Finally, transmission service would be essential because of the way in which this particular group is strung out. It would be depending upon interconnections to the company of the various ( individual utilities in order to be able to trans-mit the power that would be produced from this 500-megawatt unit (Mayben, cross Tr. 3700-3701) Again, I frankly look at Consumers as a regional exchange in itself. It's got an extensive transmission system, it's got extensive power genera-tion facilities, and it is an enchange market, so to speak, and therefore the services to be supplied under the various supplements that you quoted from [D.J. No.} 105, or cited from 105, could-be supplied from Consumers alone. However, that does not constitute complete access to the regional exchange market. Ccmplete access to the regional exchange market requires that the MC Pool be able to, in fact, schedule directly from these other utilities, not just frca Consumers. 4 And in order to have complete access, they do have to have the right, the ability to use the Consumers transmission system to carry the power rnd energy that they may schedule from Indiana and Michigan Elcetric Company, through the Censumers j system to the MC Pool (Mayben, cross Tr. 3709).
\m 112
- Demonstrated above is Applicant 's ability to limit output k- of power exchange services in a relevant submarket of the power exchange market. We turn to the source of its power to control price. Mr. Mayben explained how Applicant 's large size (repre-senting a joining together of utilities of formerly separate public and private utilities ; (Wein , p .d. 51, 52; pp.100-101, supra) gives it bargaining power in dealing with small systems in its area, in terms of reserve sharing; Q. Now under those circumstances, would there be some bargeining range at places where the bargain could be struck?
A. Yes. My experience in negotiating such arrangements is there is such a bargaining range. Obviously the small system seeking coordination vould like to be a full member enjoying the full benefit or the complete sharing of those reserves on a per unit basis, a percentage basis. On the other hand, the large system usually will negotiate for comething less than a full shar-ing of those reserves. (Mayben, direct,Tr. 2632) With great candor Mr. Aymond stated his view that use of ~ bargaining power Applicant had abtained through its former acquisitions and concentration in control of formerly separate utilities was justified: Q. With respect to the first part of your answer, are you suggesting then that Consumers Power should have the benefits of previous acqui-sitions over the years which now result in a very large collection of central stations under a single ownership? 9 113
( A. That is part of Consumers Power Company, and it 's something I think we 're entitled to. Q. If that results in an arrangement in which--if Consumers Power proffered coordinating power and energy to a very much smaller utility gets much larger benefits in proportion, then you believe that you are justified in refraining from proffering coordinating power and energy to that other entity? A. Yes (Int. No.1004, p. 266; and see Aymond, cross, Tr. 6262) Mr. Mayben relcted how market power is developed and maintained by power pooling contracts which not only physically pool electric power, but have the concommittant effect of pooling economic power. _*] Q. . . . Let 's assume that at the time of coming together into a power pool you had five separate central stations, each under separate ownership, with no previous arrangements betueen any of them. Where would the bargain be struck? A. Well, most often, the bargain would be struck with a complete, equalized reserve arrange-ment. In other words , the benefits would be
.. shared equally, proportionate to the respective loads.
Q. And does the fac't that four of them have a prior arrangement have an effect on the bargaining?
*/ Mr. S1'emmer ignoring size or previous pooling arrange-ments, testified,that the price or terms of the transaction should be governed by bargaining. (Slcmmer, cross , Tr. 8969-70) 4 9
114
(. A. Yes, it does. It reduces the bargaining strength of the fifth member seeking admission to that coordination group. O. Is that the same situation or a different situation than a small company, either private or public, in Michigan's lower peninsula, attempting to bargain with Consumers Power Company for coor-dination? A. Well I would say that same situation could be expected to occur, yes. (Mayben, direct, Tr. 2632-331 Or where two large integrated systems pool: Q. What would be the effect of bargaining power of the small system as a result of the power pooling between Integrated System A and B? A. Well, I would expect the bargaining strength, the bargaining position of the small system to diminish as he had to deal with the com- ,( bination of A and B, as opposed to just A alone. (_ (Mayben, direct,Tr. 26561 Q. Now, sir, the Michigan Pool, from your diagram, is further interconnected to Ontario Hydro to the east and MII0 and Commonwealth Edison to the south. What effect does this have on the bargaining situation between Consumers Power Company and Northern Michigan, or let's stick to the MC Pool since you have the number for that? A. Well, again, as the effective entity that you are attempting to deal with in coordination grows in size, the smaller system has less and less of an advantage to offer the larger system. And I'd have to say that you probably would not find the benefit with normal engineering accuracy. if you tried to find the benefits flowing to this whole regional market of the MC Pool attempting to pool with the combination of all these utilities comprising the regional power exchange market. (Mayben, direct,Tr. 26901 115 s
(' This testimony on effect of bargaining power was uncon-troverted by Applicant, and indeed Dr. Pace confirmed that the existence of alternatives would have an effect en the bargaining (Pace, cross,Tr. 8966-67). Applicant makes no bones about relying on its intercon-nections and pooling contract with Detroit Edison, and with the MII0 systemsin its bargaining with small systems in its area, as illustrated by the following colloquy in the transcript: [Mr. Ross] O. And it would be a system with a consider-ably higher level of reliability and a considerably lower reserve requirement on a percentage basis than you have assumed in your study. Is that not correct? [MR. BP.AND] I object to the form, as to an C~ ambiguity in the word "it." When you ray "it," do you mean Consumers by itself, or Consumers as part of a pool? [MR. ROSS] I see. Well, I consider Consumers Power Company as the Applicant here, as existing in itself _and also existinn with respect to its present contract arrangements ano its present interties , just as any other pouer system exists in this way. And when I refer to Consumers Power that's what I mean, and the witness will so understand. [MR. BRAND] Then I withdraw my objection, Your Honor. It has been explained in the context and we can argue the significance in the briefs. (Lundberg, cross ,Tr. 9093-4) (Emphasis added) The dollar value of Applicant's market power was measured by Mr. Helfman's studies comparing the benefits of increasing se 116 s e -
degrees of coordination for the M-C Pool, Holland and Coldwater. Mr. Helfman's studies show that restricting the small systems frcm constructing pouer suppl.y under a program of full coordinated development would prevent them from realizing savings up to $170,312,000 or 18-197. (Helfman prepared testimony, p. 31; D.J. Nei. 202, Schedule 1) . The underlying assumptions for the gen.eration and trans-mission expansion programs he studied were that power exchange services would be available on fair terms. His specific assumptions were that reserve sharing would. be available on Gainesville terms; that opportunities for c oordinated develop-ment would be offered to small area systems. by way of equity participation or by way of the purchase of poner from speci-
\ fic generating units at unit costs; that trnnsmission service could be purchased separately from other se:rvices Applicant offers ar a rate that would fairly compensa te Applicant for its investment. The net result of his stud-ics was to show quantitatively the deleterious effect on the small systems of ,
not having access to power exchange service.s on fair terms. None of Applicant's witnesses directly challenged the i proposition that Applicant's facilities offered the only path for the smaller systems to enter the r agional power exchange. However, Applicant attempted to cast doubt on this proposition and asked Mr. Helfman whether hiis studies proved that under no circumstances could a network of transmission be built by the small systems which could be economically justified and would obviate the need for whneling services. (Tr. 3496). y .,e- ,, , . -, ,- ~,,-v- .-p 117
, - , - , - - - - , - - - - , - -- e -.+pm-- , - , re---- pn- ,
Mr. Helfman testified that he had made no studies to establish that universal negative (Tr. 3496); as a cautious engineer, he was loath to speculate that under no circum-stances could sneh a transmission network be economically justified. Mr. Helfman's subsequent testimony as to the transmission cost calculations he did make, however, shows quite clearly the very high probability that construction , of transmission facilities by the small systems in lieu of relying on Applicant's transmission for their coordination would not be economically feasible: Q. [By Mr. Brand] Did you make any rough calculations as to the cost of a 345 loop connecting Lansing, Dow, and the MC Pool? ( A. Ycs. I found that the cost per kilo-A watt of transmitting power to the members of the Coordinated Intervenor Groun and to Lansing in view of the relatively long' distances involved, and the comparatively small size of the trans-mission system, probably the Ludington trans-mission system, as compared to Applicant's vast transmission system, the double consequence of these factors was that the cost per kilouatt of transmission on this Ludington system was almost twice that on Applicant's system, Applicant's 345 kv system. So I realized it was not economically feasible and I abandoned that (Tr. 3531) . Q. Now, based on your calculations, did you arrive at a quantification of comparisons between the cost of the MC Pool constructing their own transmission as opposed to wheeling? A. Yes. Uithout going into details, as a result of this calculation, I was convinced that if the owners of the so-called Ludington Nuclear Plant vere to construct their own 345 kv trans-( / mission system, the cost per. kilowatt of power 118 s
l i s' delivered from it would be approximately 55 per-cent more expensive than Applicant's oun average cost per kilowatt in the 345 kv transmission system. This convinced me this was the wrong path to take, not only from an engineering standpoint, but I could not see how REA could ever finance any portion of this, in view of what was my under-standing of the policy of REA here in Washington, that if there's an alternate way of performing the service that is more economically feasible, cheaper, and just as good, then the REA would prefer that that one be adopted because it's a saving of natural resources and money (Tr. 3566-3567). w w w Q. How I think you were asked at one point in time about transmission to Coldwater. Did you make any study as to the cost of building inde-pendent transmission between the MC Pool and Coldwater? A. Yes, I did; it would have been a very expensive line. It would have been so expensive, ( in fact, that, by comparison, it would be far cheaper to rely upon Applicant to wheel any power to Coldwater, which is sold by the 14C Pool and Coldwater should also be wheeled by Apolicant. It would be far cheaper (Tr. 3534-3535). _*/ In summary, it seems clear that if any small system in Applicant's area of the lower peninsula wants access to the power exchange services which are prerequisite to coordina-tion, ordinarily it must attempt to deal with Applicant, the only existing " full line" supplier of those services. As we shall detail below, even small systems on the periphery of the market are faced with dealing with Applicant because of the marketing practices of Applicant's neighbors, whether they stem from territorial agreements or unilateral decisions to avoid competition. l
" ... The possibility of obtaining substitute facilities l
! is*/not a sufficient ansuer if there is in fact a monopoly." 652 (1962) National Screen v. Poster Exchange, 305 it, F.2d 194 647,84, F.2d 4 of citing Gamco, Inc. v. Providence kru i (footnote continued)
~
l l l 5 . Under these circumstances, Applicant has a monopoly of power exchange services. It is the single seller of emergency power in.the amounts necessary if one is to install 800 mw units. It is the single actual, as compared with potential, seller of transmission services. It is the single actual . seller of opportunities for coordinated developments of the magnitude capable of supporting unit sizes in the magnitude of 800 mw. (As Mr. Helfman's studies showed, with transmis-sion services there was a potential coordinated development of one 500 mw nuclear unit.) Applicant is alco the single existing entity capable of buying surplus power from a small system which wants to construct a large unit. Applicant attempted to rebut this demonstration of its market power by a statistical study presented by its economic expert, Dr. Pace. The study purported to show that while Applicant's share of the bulk power supply market (as he viewed it) had gone up some over the period from 1960 to 1972, it had not gone up very much. He testified that of the distribution systems that remained in independent owner-ship during the period of his study, 1960-1972, the percentage of power requirements supplied by. Applicant was "a relatively low and stable percentage;" his studies showed the percentage to have increased from 12% to 17% (Pace, direct, p. 40) . Cross-examination revealed that much of the growth in Applicant's market share, even under Dr. Pace's method of
* / footncte continued ToEacco Growers v. Heal (CA 4,1950) 183 F.2d 869 and Associated Press et al. v. Unitea States 326 U.S. 1 (1945).
I 9 9"-"*-"T F d y w-w _ g _
is computing market share, was hidden by two factors: (1) the purchase by Edison Sault Electric Co. (not even in the lower peninsula) of an old hydroelectric facility formerly owned by Union Carbide, and (2) the switch by Southeastern Coopera-tive of part of its load from Applicant's bulk supply system to Detroit Edison's. */ Wh'en as,ed h about these items, Dr. Pace agreed that it is unlikely that other opportunities for abandoned hydro-electric projects would become available (Tr. 7419-7420), ** /
*/ This occurred only after its engineering studies showed it was able to overcome the burdens of constructing the trans-mission required and after Applicant's efforts to deter REA financing for the transmission had failed.
**/ Applicant by deed restrictions ensures that its abandoned hyciroelectric stations are not used as bulk power supply sources.
Mr. Armond, discussed this policy on cross-e:: amination: Q. Sir, is it correct that you have hade a policy in disposing--Well, is it correct that from time to time ! you have abandoned or disposed of hydro electric projects !
)
formerly owned and operated by the Concumers Power Company? (footnote continued) l
?,
121 j
i computing market share, was hidden by two factors: (1) the purchase by Edison Sault Electric Co. (not even in the lower peninsula) of an old hydroelectric facility formerly owned by Union Carbide, and (2) the switch by Southeastern Coopera-tive of part of its load from Applicant's bulk supply system to Detroit Edison's. */ Wh'en as,ed k about these items, Dr. Pacc. agreed that it is unlikely that other opportunities for abandoned hydro-electric projects would become available (Tr. 7419-7420), ** / f s
*/ This occurred only after its engineering studies showed it was able to overccme the burdens of constructing the trans-mission required and after Applicant's efforts to deter REA financing for the transmission had failed.
**/ Applicant by deed restrictio'ns ensurcs that its abandoned hycroelectric stations are not used as bulk power supply sources.
Mr. Armond, discussed this policy on cross-e:: amination: Q. Sir, is it correct that you have hade a policy in disposing--Well, is it correct that from time to time you have abandoned or disposed of hydro electric projects formerly owned and operated by the Concumers Power Company? (footnote continued)
~
121 - - _ , _ _ _ .
admitted that it did not appear likely that alternative sources of power supply would become available to other wholesale purchasers (Tr. 7420-7421), disowned the change as an indication for the future (Pace, cross Tr. 7419-22) and conceded that the change from 12% to 24%, after adjustment, did not indicate a relatively stabic percentage (Pace, cross, Tr. 7421-22). Dr. Face also conceded the " low" percentages for Applicant's market share resulted frem his ignoring all of the market Applicant had captured by acquisition prior to 1960 (Pace, cross Tr. 7411) . I u
** / footnote continued.
A. Yes, sir. Q. Now is it correct in the deeds disposing of these projects that you restricted, as a restrictive covenant in the transaction, the use of the water power for the generation of electric power forever more after the. disposal? A. I think so. You will recall, Mr. Brand, that I pointed out to you than that usually we were disposing of these on the grounds that they were no longer economic for us to operate, and we were disposing of them for a very nominal consideration, perhaps $1 in most instances. And apparently our lawyers felt that it would be unfair for those to wind up in the hands of a competitor for that nominal a consideration (Tr. 6433-6434). 122
- b. There Are No Effective Regulatory Restraints Upon
\ Applicant's Power to Deny Access to Power Exchange Services.
We turn to the question of whether Applicant's economic power to restrict access of others to power exchange services is effectively restrained by any regulatory controls. As originally proposed, Title II of the Federal Power Act would have established a quite broad system of regulation, converting electric utilities into common carriers and empowering the Federal Power Commission to regulate entry into the industry, control the construction, extension of abandonment of facilities, and compel interconnections, wheeling, expansions of facilities and sales of energy. As enacted, however, Title II was far more modest. (49 Stat. 847). The Commission was given jurisdiction over interstate sales of electricity at wholesale (16 U.S.C. 824(b), 824d(a)) and over mergers, acquisitions and the issuance of securities by electric utilities engcged in transmitting energy in interstate commerce (16 U.S.C. 824b-824c). And in Section 202(a) of the Federal
- Power Act (16 U.S.C. 824a(a)), the Commmission was directed to encourage the voluntary interconnection and coordination of electric facilities, while Section 202(b) (16 U.S.C. 824) authorized the Commission, under certain limited circumstances, to order interconnections and sales of exchanges of electric l
energy. It was this very inability to regulate power exchange services that in part was responsible for enactment of Part II of the Federal Power Act in 1935. . 123
k Some states such as the State of New York which as of 1935 had had extensive rate and other public utility regu-lation, for many years, were taking an interest in this new aspect that technology had developed and had not . yet been subject to regulation: The Economic Aspects _of Transmission and Interconnection
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The savings arrected in instaflaFfon by the inter-ccnnection of systems is also very great in that it obviates necessity for large . reserves of generation machinery. Isolated stations which must rely on their own resources to ensure continuity of service are practi-cally compelled to install sufficient spare generation
. equipment to carry their peak loads with their largest units out of operation. The effect of interconnection in this respect is to pool the spare equipment, the amount reauired by the interconnected sy: _ cms being very little greater than that which would have been necessary for the system with the largest individual load if interconnection had not obtained. */ _
Some of the initial proponents of federal legislation per-ceived the need for federal regulatory authority with ' sweeping power to take affirmative action. For example an FPC memoran-dum stated: . Title II of this bill **/ provides for regional development in this industry -- under the supervision of the Federal Power Commission. It proceeds upon the engineering truth that most effective utilization of our power resources requires positive Federal action designed to develop these resources on a regional-i rather than a State basis. L ~ Until the present time our regulatory power policy has been this purely negative policy of local rate control. Title II of this bill says, "A purely nega- [ tive policy of local rate control by the States is not sufficient to produce an abundance of electricity at the. lowest possible price. This negative policy , L(s c */ State of New York, Legislative Document No. 102 (1935) pp. 35-38, Referred to by Dozier Devane, FPC Solicitor in the
. Senate Interstate Commerce Committee Hearings on S. 1725, 74th Cong., 1st Sess., p. 274 (1935).
" **/ Proposed Public Utilities Act of 1935.- Title I was-EEe IIolding Company Act. [ footnote supplied]
L n.c w
4 , is not enough; it must be supplemented by a positive ( policy of supervised coordinated power development in the public interest." 74th Congress,1st Session Senate Interstate Commerce Comm. Hearings on S. 1725
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[ Footnote supplied] pp. 276-278. Thus, of the three types of power exchange services referred to above, Congress chose not to afford the Federal Power Commission authority to compel two of them, " wheel-ing" */ and coordinated development. "Rese'rve sharing" could be compelled under Section 202(b) **/ -- not on the Commission's own motion, but only on the application of state commission or a person engaged in the transmission or sale of electric energy. The subsection was carefully tailored to exclude the ' compulsion of a coordinated devel-opment by the proviso: "rrovided, that the Commission shall have no cuthority to compel the enlargement of genera-( tion facilities for such purposes ,***"
*/ S. 1725, Section 203(b) made all public utilities subject to FPC jurisdiction " common carriers." The provision was dropped from the legislation prior to enactment.
**/ Section 202(b) provides in pertinent part: Whenever the Commission, upon application of any State commission or of any person engaged in the transmission or sale of electric energy, and after notice to each State commission and public utility affected and after opportunity for hearing, finds such action necessary or appropriate in the pu.blic interest it may by order direct a public utility (if the Commission finds that no undue burden will be placed upon such public utility thereby) to establish chysical connection of its transmission facilities with . the facilities o f one or more other persons engaged in the transmission or sale of electric energy, to sell energy to or exchange energy with such persons: Provided, That the Commission shall have no authority to compel the enlargement of generating facilities En: such purposes, nor to compel such public utility to sell or exchange energy when to do so would impair its ability to render adequate service to its customers.
N 125 e
While it is unquestionably important and valuable, r: erve sharing, without more, provides only partial benefits of coordination. Moreover, invoking the processes of the Fed-cral Power Commission can be expected to require a substan-tial budget -- the expenses of litigation may offset several years of savings from reserve sharing coordination.
- c. Economic Effect of State and Other Federal Regulation of the Uholesale Firm Power and Retail Firm Power licrhets.
We turn to the question of whether the existence of rate regulation of wholesale firm power sales is sufficient to break the impact of monopoly power. Dr. Pace testified that despite Applicant's large market share, three factors combined {' to remove any market power it would otherwise have: (1) Appli-cant's policy of being willing to provide wholesale firm power to new entrants into retail distribution; (2) what he understood from counsel to be Applicant's legal obliga-tion to make such sales and (3) the existence of comprehensive utility regulation of the rates for wholesale power service. (Pace, p.d., p. 6, 16, 24, 39, 42) Dr. Pace was wrong about Applicant's supposedly long standing policy "to provide wholesale power to any present or potential utility system in its service arca" (Pace p.d.,
- p. 23). Applicant's Chief Executive Aymond, when queried about such a policy testified:
/
e. 126
l A. Now whether or not Consumers Power Company should serve a new wholesale customer uhich consists of a community that it is now selling at retail and the community determines "We're going to form a municipal electric system, and we're going to ask Consumers Power Company to supply the power for that," then the question is, should we supply it? Well, that's the question I'm not sure of. (Aymond, cross, Tr. 6497-0) Mr. Aymond had probably received legal advice from some-one other than Dr. Pace's attorney for he testified: Now Mr. Brand is asking about wholesale pouer. sale and wholesale to other utilities. Unless there is some requirement for the Federal Power Commission, and thus far I knou of none except possibly the Otter Tail case, ue have no . obligation to serve other utility ccapanies. [Aymond, cross, Tr. 6496] We note that Mr. Aymond started as an attorney in Appli-cant's legal department in 1947 and became its General Counsel and a Vice-President in 1955 (Aymond, direct, Tr. 6045) and accordingly was in a position to determine the legal view on which the company would act. As Dr. Pace testified at p.d., p. 24: Private exclusionary power obviously can exist only under those circumstances in which regulators cannot mandate wholesale power sales. In other words, since regulators cannot mandate wholesale sales, private exclusionary power does exist. Professor Wein disagreed with Dr. Pace as to whether rate regulation which only removed excess profits was satisfactory to eliminate monopoly power: I do not believe that the best intentioned regula-tory agency can provide the benefits which even a ( small active sector of competition provides. The 127
\ reasons for this lie in the differing nature of competition and regulation. Regulation cannot make a firm more efficient, it cannot force inno-vation. (Wein, p.d., p. 31) Dr. Pace indicated that when he wrote his doctoral dissertation he had been in basic agreement with this analysis of Dr. Wein's but that he had changed his view af ter visiting a number of utilities (Pace, cross, Tr. 7289-90): Q. With respect to the added investment due to inefficiency, did you assume at the time you pre-pared your dissertation, that regulatory agencies had effective means with dealing with that problem so that they could regulate away that kind of monopoly profits? [By Mr. Brand] Q. Did you assume that they did or did not? Which (~m one? A. I think I assumed they did not. Q. Had you visited any utility prior to making your-- prior to publishing your dissertation? A. One Q. Which one was that? A. Consumers Power Company. Q. I see. j']
*/ A recent report of the Comptroller general concluded:
FFC does not require electric utilities to obtain competitive bids. *** According to FPC officials, FPC's work is not in sufficient detail to ensure that utilities purchase power
-equipment at prices, terms, and conditions which are reason-able and the best obtainable.
Although 17 [ state) commissions re
- audits included analysis of utilitics' ported that theirproedrement practices,
(.' statements made by the commissions indicate that not many -- (footnote continued on next page) 128
, Finally, as a purely economic matter, Applicant's Dr.
Stelcer agreed that uhere there are three markets tihich are linked so that the first is a factor market for the second, and the second for the third, so that comprehensive regulation in the second and third market would not obviate the need for either regulation or competition in the first: [By Mr. Brand] Q. I'm going to ask you to assume that there are three markets involved in an economic policy determination, and it's a case uhere they're all vertical. The first market supplies the second, and the second market supplies the third, and the third market is regulated, the second market is partially regulated, and the first market is completely unregulated. Now, sir, insofar as the interaction between competition and regulation, would the regulation of the third market and the partial regulation of the second market justify a con-('s clusion thac enforcement of competition in the first market was unwarranted? A. This is the completely unregulated market? Q. Yes, sir. A. No (Tr. 7068-7069) . .
*/ (continued from previous page) ..
II any -- review or audit equipment purchases in sufficient-detail to determine that the prices, terms, and conditions are reasonable and the best obtainable. *** None of the 41 commissions took exception to a utility's cost of nuclear or non-nuclear power equipment from January 1971 through December 1973. United States General Accounting Office, Report to the Subcommittee on Budgeting, Management, and Expenditures, Committee on
's Government Operations, United States Senate: survey of Federal and Electric Utility Procurements of Power Equip-ment (B-174311 pp. 14-18).
129
Q. Now, let's assume that the retail power market is comprehensively regulated, the tihole-sale market is comprehensively regulated, but the power exchange market is completely unregulated. Would you, under those conditions, say that there is no need to impose -- excuse me; no need to enforce competition in the first market? A. Well, first of all' I have to assume it's a market. Q. Yes sir.
^
A. Second of all I have to assume there is ' substantial monopoly power in that market. Q. Oh, yes, sir. A. And then third of all I have to assume that regulation neither exists nor is attainable in that market. Q. That's correct. A. Then.I would want there to be comnetition in that market, if it's a mari:ec (Tr. 7079) . e k e 130
'd. Congress by Enacting Section 105c, Has Eliminated the Need for the Board to Decide Enether Federal and Secte Regulation Fully Reolace Comoetition.
There has been extensive comnent by both economists and regulators regarding the theoreticci and practical problems which prevent rate regulation from being an adequate sub-stitute for a competitive pricing process. This was specifi-cally called to Congress' attention when the Atomic Energy Act was being considered. In 1954 testimony before the Joint Committee on Atomic Energy, Leland Olds, uho had been a member of the Federal Power Commission from 1939-49 serving most of the time as chairman, and who had been involved with state (~ regulation of electric power since 1929, testified at length-on the inadequacy of regulation vis-a-vis competition: First, I will deal with the ineffectiveness of regulation. This was brought out by two well known authorities at a symposium on power costs staged by the American Society of Civil Engineers in 1937. The speakers were Prof. Alden B. Thresher, of the Massachusetts Institute of Technology, and Vice President Leverett S. Lyon, of the Brookings Institute. Thresher definitely attributed the direction-taken in broadening Federal power policy during the 1930's to the inadequacy of regulation. He suggested that the accepted scheme of regulation in the United States is, by its very nature, static and ill adapted to the econcaical and technical changes characteristic of the power industry. He said: 't 131
( It is more accurate, therefore, to regard the Federal power program, whatever its merits or defects, as a response to a long standing maladjustment, not as a punishment meted out to malefactors. The mach-inery of State regulation is of ten said to have " broken down." More strictly speaking, it has always lagged behind the situation with which it strove to grapple. . This was true even in the days of local power units, because of the rapid rate of technical change. .It is doubly true now that regional interconnections extend over areas beyond the jurisdiction of regula-tive authorities. Lyon attributed the introduction of the Federal yardstick policy to the lack -of any satisfactory cost basis for fixing rates under regulation. Lyon pointed out that in a competitive field, as contrasted with the monopolistic utility business, the costs of an individual company may have no direct relation to the prices at which it can sell its product; that it does high-cost companies no good to complain ('. that their. costs will not permit them to compete prof-itably; that, in such a situation, a high-cost manufac-turer has no choice but to forget part of his costs, closing his eyes to some of his fixed charges and accepting the fact that his investment is not worth as much as he thought it was. He stated that a buyer should be in a position to-purchase, at any time, at as low a price as anyone will offer, if the resources of the liation are to be used so as to give the greatest possible output for the smallest possible input. - He held that the theory that prices should cover costs is in conflict with this objective and provides no incentive to keep costs down. Mr. Lyon then asserted that in the field of power, because it is a natural monopoly, the ccmpetitive method of price determination will not apply and that, since a monopoly cannot be trusted to create prices in the public interest, social regulation of rates has been established in every State. He continued: 132
\ . Since the commissions which have been given this responsibility have no competitive te ts, they have groped none too happily, in an effort to relate costs to prices. *** It is the raising of such issues of costs as these has introduced the now much discussed yardstick as a proposed method of determining what prices should be. Of course, the so-called yardstick is not a new idea. Every method that can be applied to determining what prices shall be--even competition--is a yardstick, but the great c;;tensicn of Government operations as a means of comparing costs does offer, in size at least, something ace. *** Putting the two statements together we see that the inadequacy.of utility regulation is due to the fact that: (a) uithout competition it has no cost standards to go by, and (b) it is static. Just a word or two as to what is meant by the statement that regulation is static. nate regulation r- has always proceeded mainly by determining whether a (' public utility company is making more or less than a fair return on some rate base. This is dctcrained in terms of an accounting analysis of the last full year for which complete figures are available. Thus, utility rates never reflect the louering of costs which would result from enterprising sales objectives. Instead, it promotes a lazy monopoly attitude toward the business. Most unit costs in the electric power business come down rapidly as average consumption of electricity
. goes up. If a private power company would make rates based on such lou costs and then put on a campaign to achieve the sales objectives which would make them profitable, we would have more justification for the privately owned segment of the power industry.
In enacting Section 105c. , Congress adopted the olds-Wein view o'f the short comings of regulation'as an effective substitute for competition. .
*- e 133
. s
- e. Applicant's Monopoly Power Is Strengthened by
; its Major Neighbors' Refusals to Offer Wholesale Power in Applicant's Geographic Market Whether or not Such Refusals Result from Conspiracies to Allocate Markets. ,
I Refusals by Applicant's major neighbors to deal with small systems on the periphery of Applicant's market area further strengthens Applicant's monopoly with respect to wholesale and power exchange services. There is some indi-cation that these refusals are attributable to " gentlemen's understandings" among the major utilities. But even if entirely unilateral, they are an important component of the situation inconsistent with the antitrust laws. The parties are agreed that the economics of power supply are dependent generally on size of load and distance from. [ existing facilities. (Mayben, direct, Tr. 2743-46; Aymond, cross, Tr. 6225T
~
Accordingly, those small cyctems near the periphery of Applicant's system should physically be able to enter into power transactions with Applicant's larger neighbors. Nonethe-less they have been almost altogether unsuccessful in obtaining po'wer from those systems. The best illustration of these is the attempts of South-eastern Michigan Rural Electric Cooperative, Inc. (Southeast Coop or Southeastern) to obtain a more favorable power supply for its retail market extending across the Ohio-Michigan , border. ji/ jl/ Southeast Coop has had a substantial turnover in personnel and the Department proved facts regarding that entity almost (_ entirely from documents from Applicant's files and from the , (footnote continued on next page) 134 '
Prior to 1966 Southeast Coop obtained power for its Michigan loads from Applicant; its Ohio loads were originally served by the Toledo Edison Company directly, and then later by Toledo's wheeling power from the Buckeye G & T, of which Southeast Coop is a member. Both the earlier Toledo Edison contract and the Buckeye arrangement prohibit South-
~
east Coop from taking power in Ohio and carrying it across the border into Michigan (D.J. No.128) gi/; and similarly, Southeastern's contract with Applicant prohibits Southeastern's use of the power in Ohio. This situation is concisely described in a June 2, 1967, memo from W. C. Morris, REA Planning Engineer, Northeast Area - PD to John S. Scoltock, Chief Engineering Branch - NEAE. The Southeastern Michigan Rural Electric Cooperative, Inc., is e distribution cooperative which serves an area in a outheastern Michigan and northuestern Ohio, i To serve its system, the cooperative has for some
- years and currently purchases pouer from the Consumers '
Power Company for the Michigan portion of its system and the Toledo-Edison Comnany for the Ohio portion of for the Ohio its system portion ofanditsthe Toledo-Edison system. Compan>ls system is The Cooperative separated at the state line as contractual limitations with both power suppliers prevent the movement of pouer and energy across the line. (D.J. No. 128, no . 2, p. 1)
*/ (continued frcm previous page) official files of the Riiral Electrification Administration (REA). Because of the seriousness of some of the matters contained in the REA documents, the Dep rtment offered to call Mr. Robert Badner, field representative of REA too for cross-c:: amination con-
/ cerning matters in the REA files, but the offer was declined (m by Applicant. (Tr. 39431
**/ Applicant's awareness of this situation is reflected in Int. No. 1055.
135 ,
The above-described situation is detailed in the follow-ing exhibits: Buckeye Power, Inc.'s Wholesale Power Agreement of September 15, 1966, paragraph 17 _*/ , Agreements of South-eastern Michigan Rural Electric Coop, Inc. , for Purchase of Electric Service for Resale from the Toledo Edison Company, dated May 8,1952, page 4 **/, and Agreement between Applicant - Southeastern dated May 4,1952, p. 4 V10. *1f/
.ne question of service from Toledo came up again when in August, 1956, Applicant gave Southeastern a notice ~ of
*/ Paragraph 17 of the Buckeye-Southeastern contract based agreement in-oE a 1956 cluding uultiparty Buckeye and transmission Toledo Edisonand delivery'Consumntion provides:
- N Within Ohio. The. Purchaser shall so conduct its operations enat ene efectric pouer and energy dclivered to the Seller under the provisions of the Power Delivery agreement and subsequently delivered by Seller to the Purcheser at any point of delivery established hereunder shall be consumed wholly within the State of Ohio." (D.J. No. 128, no . 4)
* */ Page A in pertinent part provides: " Consumer [ Southeast Coop] agrees that it will wholly and permanently eliminate all interconnections between the portions of its system to be served by the Company hereunder, and any and all systems which have lines crossing the s tate line between the State of Ohio and any adjoining state, and that it will keep the portions of its system served by the Company hereunder, so disconnected at all' times this contreet is in force, and any failure so to do will immediately cancel and render this contract null and void without further act of the Company.
It is the purpose hereinbefore mentioned', while being served by the Company hereunder, shall be wholly isolated from any and all systems which have lines, or are interconnected with systems having lines, crossing state boundaries." (D.J. No. 128, no . 26)
**f Applicant-Southeast 1956 contract, p. 4, 510, third sub-paragraph provides: "The Customer agrees that the energy furnished hereunder shall be distributed by the Customer only to its members or users resident in the State of l Michigan. Said electric energy shall be used only within the oc State of Michigan, and if cny portion o f said electric energy is or may be used outside of the State of Michigan, the Company may immediately terminate this careement on written notice to the Customer. (D.J. No.128, nc . 25) 136 n
i - termination of its contract together with a threatened rate increase. (D.J . No . 128) _* / An internal memorandum of Southeastern's consulting engineer explained the problem of seeking out an citernative bulk power supply for the Michigan coops: The Cooperative presently purchcses about one-quarter of its power from Toledo Edison for eight mills and, within tuo years, she'-ld be p'urchasing this portion of its power ender the Buckeye arrcngem2nt Eor not more then 5.5 mills. Previous studies (prior to Buckeye) have indicated good economic feasibility by building transmission lines from the Toledo Edison crea into the Michigan portion of the system. Houever, the precent contract with Toledo Ediron prohibits this in quite emphatic longuego and it is clso now being uorked out by Buckeye, under which many of tha f Ohio Fouar Companies vill be uheeling for the Cooperatives. 1The Cooperative is isolated from the liichigan G & T groups, as far as eranomic transmission is concerned, so that ua can look for no help in this regard. (D.J. No. 128, no, 19, p. 5) The sama memorandum indicates that chile Applicant pro-posed a rate increase for Southeastern, it was giving much , publicity to rate decreases to all its retail classes of customers. The net effect of all this, as Mr. Rogers put it in his memorcndum, uns: . . . 1;ith the Cooperative lines intermingled with.those of the Pouer Compcny, Southeastern is faced' uith an almost impossible situation. They found it almost impossible to compete or even-1ald their oun previously, and uhen faced
*/ D.J. No . 128, no. 9, p . 1, memo Darling to Goodwin, Feb. 14-16, 1966.
137
with both a reduction in other rates of the Power Company and an increase in their oun rate, their situation uas only some-$18,700 (which uns generally high, looking at past experience) and a $15,000 increace in the cost of purchased power will virtua11 uipe this out. (D.J. No. 128, no . 19, p . ) Southeastern accordingly searched for other alternativas. He discuss these in turn. Applicant contends that Toledo's decision not to sell in Michigan was a unilateral policy decision and not the result of cgreement with Applicant. According to two separate reports of tuo field agents for REA, however, Toledo's decision was taken pursuant to its agretment with Applicant on a territorial allocation. One report dated February 14-17, 1965, to John H. Scoltock by Robert Badner lists reasons given by Toledo, including (1) FPC jurisdiction, (2) conflict with Buckeye Power (presumably referring to the
" Buckeye Pact"), and (3) territorial agreement with Consumers Pouer Company. The memo goes on to indicate: -
Surprisingly the company did not appear to be too concerned over items 1 and 2 [FPC jurisdiction and Conflict uith Buckeye Power] outlined above. Conversely they seemed disturbed and concerned over the thcught of invading the territory of the Consumers Power Company. In. the past it was believed that the company avoided service in Michigan primarily beccuse of FPC jurisdiction. Today. this is not the case. In feet it is almost certain the comoanv vill interconnac: w:ta ene Consumers Power connanv sometime in 1929 or 1970. Tne compcny orficiats were c6visec :nat eney would not be expected to serve _in Michigan but rather, the cooperative would provide the necessary 138 s.
( substation and transmission facilities. They still stated that they were not interested. Again they indicated.that they did not want to invade the Consumer Power Company territory. (D.J. No. 128, no . 8, p . 1) In another memo dated February 14-16, 1956, to James U. Goodwin, Mr. Thomas Darling confirms Mr. Badner's advice.
- 1. Desire to avoid Federal Power Commission jurisdiction. The Company's letter of Hovember 23, 1965, stated that as an Ohio Company, with operations confined strictly to the State of Ohio, it was in no nosition to serve the cooperative nor would its contract so permit. The probability of early enforced Federal Poner Commission iurisdiction or the
!cct that Michigan 5 [ Southeastern's Michigan dis tribution coops) will be villing to take service at the state border did not change the Company's attitude.
- 2. Reluctance to violate an undernennaine
,, ,,4 -s - ,, e 4 1 4_ e.,, , ,n ,,1d c4 k c - ,, - . ., ,, ,- e -w - -
f cvnen eka cerca l ir n <nn ebn nehe- e nm, c,,, ' c corrito7y.
- 3. Concern that Toledo Edison might be accused of violating the "Bucheye Pcet" by reason of transmitting poner into Michigan. .
Although Toledo Edison appears ademant at the present time in refusing to serve Michigan
- 5 this source would be the most favorable from both (D.J.a No.
rate and 128,engineerinr) no. 9, p . 1(standpoint. Emphasis added) In a later memo of Darling to Goodwin, following another meeting uith Toledo Edison, Mr. Darling states: Of the three reasons mentioned'in my field report of February 14-15 uhy Toledo Edison refused to serve across the state boundary line, Mr. Schwalbert stated that the first reason (desire to avoid Federal Power Co:nmission je isdiction) was not nou as vital as it had previously been, in view of the fact that enforcement of Federal Pouer Commission K , 139
l jurisdiction is anticipated in the near future. As for the concern that T.E. might be accused of violating the Buckeye Pact" by transmitting power into Michigan, he conceded that there might be a poscibility of arranging for bulk delivery of power by T.E. to Michigan 5 at the state line, thus avoiding " Buckeye" implica-tions. There still remains, however, T.E.'s reluctance to violate an understrnding with Con mmrn thet neither utili tv vill cross the steto boundrry into de other connony'n terri-tory. In any event, although the T.E. nource is the most favorable from a rate and engineering standpoint, the Company remains adamant in re-fusing to serve Michigan 5, and appeared uncon-cerned that partial requirements might be obtained from D.E. (D .J . No . 120, no. 23, p. 1, Darling - Goodwin, Sept. 13-14,1966) (Emphasis added) Southeastern also received rejections from Indiana-Michigan Power o f the AEP system (D.J. No.128, no.13, p. 4) letter of December 2,1965 from P..M. Kopper. * /- On the same
~
(~ day Mr. Kopper advised Applicant of its action by letter stating that 16M would not be providing service to Southeast. (D.J. No. lig The sale offer Southeast received from Detroit Edison required Southeast to build its own transmission from its load centers to Detroit's area. Moreover, Detroit Edison refused to recognize a reduction in the demand charges to allow for the cost of transmission ** / notwithstanding ~ that its service to another coop (Thumb Electric) did provide for delivery points when needed. *** / The cost, when added to a .
* / In his response, Mr. Kopper of I&M referred to an ear]4.cr letter of September 20, 1950, in which Mr. Kopper had declined to make a proposal for service both on behalf of IblI
- and also on behalf of Ohio Power, its affiliate in the AEP i system. (D.J. No. 113)
** / D.J. No. 128, no. 5, Badner to Scoltock, Sept. 12-14, 1966. ***/ D.J. No.128, no. 23, Darling to Goodwin, supra, p. 2.
140
Detroit's lower rate, made the plan prohibitive when applied to all Southeast Coop's load. (D.J. No. 128, no. 10, letter of Allen Johnson, February 11, 1966) Finally, a plan transferring the part of the load near- , est Detroit Edison's facilities was found to be marginally' - feasible and was recommended by REA personnel and ultimately adopted. * / But Ddtroft Edison' took care to keep Applicant advised of its offer to Southeastern. D.J. No. 121 is a January 31, 1955, letter from F. O. George, Senior Vice President of Detroit Edison Co. to B. G. Campbell enclosing a copy of Detroit's proposed contract and asking Mr. Campbell to contact Mr. George if he had "any questions regarding this contract or this situation." We noted above the reluctance of Indiana-Michigan and Ohio Power to make an offer to sell power to Southeastern. John Steinbrecher, Manager of Northern Michigan, testified as to AEP's response to yet another system searching for bulk power supply alternatives: According to Mr. Steinbrecher, M-C pool requests for power from Indiana-Michigan also received a negative response "and in pressing for a reason it's my understanding that the reason for the refusal was the fact that Indiana-Hichigan did not want to supply power which vould be distributed in the crea 'where power is , supplied by the Applicant." (Stei brecher, direct, Tr. 1220) _/ Efforts to deter these ties are outlined in D.J. No.124. 141
, - , , , . . . . , ,, ..g . , .- - - -,
Applicant claimed a unilateral policy not to sell uhole-sale pouer outside its present service area, but it denied any agreements with others to restrict service territory. (Paul, direct, Tr. 7950; Aymond, direct, Tr. 6071) . Never-theless Warren Sundstrand, attorney for the Village of Faw Paw and formerly an electrical engineer working for Applicant, testified he was advised by R. L. Paul that a " gentlemen'c agreement" between Applicant and the former Michigan Gas & Electric was the reason for Applicant's failure to make an offer in 1962 or early 1963. (Sundstrand, direct, Tr. 3903) */ Later, in 1966, following a tender offer by American Elcetric Power to the sharcholders of Michigan Gas and Electric, A;pliccnt ( did make an offer to the Village of Paw Pau (Tr. 3911) but promptly withdraw it uhen it appeared competition had developed between it and AEP (D.J. No. 138, 136; Paul cross, Tr. 8095-8096). While both Mr. Alphonse Aymond, Chief Executive of Applicant (Aymond, direct, Tr. 6045) and Mr. Robert Paul, its employee in charge of dealing with other competing systems (Paul, direct, Tr. 7959), denied the existence of any ' gentle-men's agreements, it is significant that in an internal memorandum of December 3, 1963 (D.J. No. 235), Mr. Paul acknowledged the c::istence of the agreement, stating: They [ Paw Paw officials] are expecting to point-out that the gentlemen's agreement not to
, */ Mr. Sundstrand prior to his legal training had worked q~ lEEE Applicant as an elcetrical engineer and had worked with Mr. Paul.
142
( infringe on other power company's territory even when no franchise or contract exists, is an act of unduo restraint of trade." Whether as a result of agreement, or based on unilateral policies, it is clear that rarely can small systems in Applicant's area of lower peninsula Michigan find alterna-tives for firm bulk power supply other than self-generation on the one hand and purchase from Applicant on the other. Whether or not the Board finds them there was a conspiracy to allocate the wholesale market, parallel restrictions on resale had the same effect. * / . ( 4
*/ To round out the discussion on territorial arrange-ments we point to Intervenors Exhibits No. 2152, 2163 concerning Applicant's relationship -with Americati Electric Power (parent of IEM, Ohio Power. and the present Michigan Power Co. (formerly Michigan Gas & Electric)) with regard to the loads of the City of South Haven which operates a municipal electric system at the boundary of the I6M-Applicant service area. These exhibits strongly suggest the existence of a i gentlemen's agreement and serves to confirm the stronger N- evidence tested above.
143
- 4. Applicant has Exercised Its Monopoly Power by Refusing Small Systems Access to the Renional Power Exchance Market.
Applicant has ' exercised monopoly power by refusing small systems access to the regional power exchange m'arhet--both by outrig denials and by denial of reasonable terms--with the anticipated , effect of retaining and extending its monopoly of the firm bulk supply and retail supply markets. It has also occasionally granted limited coordination where that would serve to preempt coordinating opportunities of others. a . ' The Denials Have Been Outright or by Denial of Rensonable Terms. The record reveals repeated instances of Applicant's
,_. outright denial of interconnection or insistence on bargrined
( terms which would unreasonably restrict others' realization of the normal benefits of coordination. Since access to high-voltage transmission is the sina oua non of almost every form of power supply coordination, l the most important exercises of Applicant's monopoly power have involved its _"ofusal to make its transmission system available to other systems for the wheeling of power. We discussed above the 1966 effort by Southeast coop, then l solely a customer of Applicant, to develop some bulk power supply ! alternatives. One of the possibilities Southeast was explor-l l ing was to obtain power from Buckeye Power from its Cardinal Station, and it incuired of Applicant whether it would be l^ willing to wheel such power to it. An internal memorandum ( ~ by one of Applicant's marketing superintendents indicates l s
the manner in which Applicant responded to this inouiry (D.J. No. 125) : The ouestion was also raised as to whether or not . Concumers Power could provide or would be willing to enter into a wheeling arrangement with the Cooperative whereby power from Ohio and the Cardinal plant would be wheeled to Southeastern. It was e::plained that the Company presently has no pro-visions for wheeling power and that the proposed connections to the. south to Ohio would involve other companies. The testimony of Robert Paul confirmed this account,of Applicant's response: A. The cuestion of wheeling was raised in the meeting with Southeastern Michigan Rural Electric Cooperative. ..~ Q. Now, what kind of a recuest was that . . . ? A. Uc11, we hcd a meeting with the board members of the Southeastern Michigan Rural Electric Cooperative to discuss a number of things, and in that meeting, someone raised the cuestion, would Consumers Power Company wheel power from the Cardinal Plant to Southeastern Michigan. O. And what was their response? , A. . . . our response was we did not have a policy or rate on wheeling, but that also such wheeling would involve other systems under which we had no control. Q. . . . could I make an assumption now that you did not intend further pursuit with respect to wheeling? Ai That's right . . . that was our' response. (Paul, direct Tr. 7934, 7936)- This would appear to any reasonable and fair-minded person te have the effect of indicating to Southeast that Applicant i
\_ would simply not be interested in wheeling. Af ter receiving s
s-this response, apparently Southeast let the matter drop; and it pursued the marginally advantageous alternative available from Detroit Edison. If Southeast thought that there was any hope of obtaining wheeling from Applicant, it almost certcinly would not have perservered in building expensive transmisssi on [ lines from its system to Detroit Edison--to which it was already connected through Applicant's transmission. Applicant was uell aware of these transmission plans and indeed seems to have sought to deter them; yet it made no offer of wheeling. We note that one reason-for Southeast's not switching its entire loed to Detroit was the high cost of transmission. 7 With wheeling it seems likely that it could have switched the ( entire load cnd achieved ali,rather than only part, of its objectives. The record makes clear that a number of other small systems were aware of opportunities for improving their bulk power supply which would have been available through wheeling over Applicant'r transmission system. But entities such as Alpena Power and Traverse City did not make specific recuests of Applicant for wheeling because they were certain that these would get nowhere. Mr. Fletcher, president of Alpena Power, testified: Q. In your contracts with Consumers' engineers, have they ever made any representations to you.with
..egard to wheeling services? ,
A. You mean have they ever offered-us the ('~
~
rights te wheel on Consumers' system? If that's what you mean, the answer is no. 146
r i Q. Have they ever advised you that wheeling would be out for your systemi A. Well, I don't believe we have ever heard it directly from any of Consumer's people that wheeling would be out. However inasmuch as ue have, in the two men who are wor, king as superin-tendent and assistant general superintendent some 32 years experience with Consumers, they, . have advised us that Consumers has never wheeled for small utilities. CHAIRMAN GARFIIUGL: .. . so far as you know . . . from your experience--they [ Consumers] have not wheeled for any utility other than a lcrge system, a part of their pool or a pool arrangement is that right? A. To my knowledge Consumers has not wheeled for anyone outside of, I believe it is called the Michigan Power Pool. (Fletcher, cross,.Tr. 4329) Mr. J. D. Wolfe said he had not asked Applicant for access to their transmission system when he was head of the Traverse City system, when asked: Q. Why not? A. I felt it was futile. (Wolfe, cross, Tr.1729)-
~
- b. Applicant Refused to Share Reserves on Reasonable Terms Ubich in Turn Chilled Specific Requests for Coordinated Development Until the 1970 Atomic Energy Act Amendments.
It is noteworthy that even in Applicant 's newly de-clared policy on wheeling, which we believa may be attri-buted to the Otter Tail decision by the Supreme Court, j Applicant conditions its wheeling service in the power ex-change market upon its retention of wholesale or retail firm power business. The record also clearly ectablishes that s small systems in the lower peninsula have been 147
s continually frustrated by Applicant's refusal to deal with them as utility systems and to enter into the kinds of coordi-nating arrangements, particularly reserve sharing, which are standard among neighboring utilities. */ This pattern of conduct by Applicant is demonstrated most dramatically in the long hirtory of the efforts by the M-C Pool and its members to be regarded by Applicant as utility systems rather than wholesale purc hasers and to obtain the kind of reserve sharing arrange: ment which neighbor-ing utilitics routinely enter into. The M-C Pool members had a serious need for a reserve-sharing arrangement because the firm power contract,under [- x which they were purchasing power from Applicent contained a ratchet provision which severely penalized their calling upon Consumers Power for emergency assistance. The ratchet clause provided that if a 15-minute integrated demand established a new peak, for as littJ.c as a 15-minute period, a capacity charge covering the cost- of the capacity for an entire month must be paid, and 607. of the cost must be paid for the succeeding eleven months under a contract clause referred to as a ratcheted demand. ( D. J. ILo . 64', **/
*/ D.J. Nos.167 and 234 are reports of c ommittees of the EHson Electric Institute outlining the var:'ious forms of coordi-nation taking niace throughout the country tcoday between utili-ties c,f ecual sargaining strength. These it iclude " reserve sharing" and joint maintenance scheduling, ceconomy energy trans-( actions, and various forms of " coordinated development," methods by which lord growth can be pooled and the c:cmbined growth satisfied by generation from large generatir..g units.
** / Page 3, paragraph 6, " Determination oE Maximum Demand,"
"II6 termination 'of Billing Demand."
- - _ _ - - - - - - _ _ _ _ - _ - - - - - - _ - - - - - _ - - - - _ _ - - _------------4F4_----__-_---------_--_ 1 _ - - - - _ - . - . - _ - - - _ _ _ _ - - - . - - -
.' / '\
In dealing among interconnected utility systems, power is ordinarily provided on an if-and-when-availabic basis. Accordingly, as no investment is recuired for the if-and-when-available service, the compensation is ordinarily the return of .the service in kind with each participant maintaining the same percentage of reserves to load. (Jefferson, cross, Tr. 8357; Chayavadhanangkur, cross,Tr. 5203-10, 1212-13) Mr. Mayben explained the sizeable charges that can develop from forced outages of even comparatively small generat-ing units where a ratcheted demand clause ic used and emergency 4 power is billed as firm power. (Mayben, direct Tr. 3839-41)_*/ Efforts by the M-C pool members to obtain a reserve-g sharing arrangement with Applicant began in the mid-1960's. D.J. No. 32 is a memorandum by A. J. Hodge, employee of Daverman Associates, engineering consultants to the M-C Pool, dated November 13, 1964, outlining the proposed basis of negotiations with Applicant. First on the list was an inter-change agreement further described as "a typicel inter-utility agreement designed about the circumstances of the Cooperatives a s and Consumers Power Company." (D.J. No. 32 also contains a f letter from Mr. R. J. Daverman dated December 27, 1963, reauesting alternative power supply proposals from Applicant.) As is evident from a memorandum of March 20, 1964, (D.J. No. 36T, Applicant wanted to obtain all of Northern ( (; Michigan's and Uolverine's load growths. Accordingly, it jL/ See Also, Munn, direct, Tr. 4071-72. 149
i N At the same time Applic ant was trying to prevent the G & T's from expanding their generation by letters to REA and to the distribution coop members of the G & T's,,and to Congress (D.J. Mos. 42, 43 and 45). D. J. No. 47 is most reveal-ing. In a letter of January 30, 1967, R. J. Daverman, on behalf of Northern Michigan, again asks for "a new interchange. agreement which would permit two-way interchange of emergency capacity . . . ." At the top of the letter, written by one of Applicant's officials, appears the notation: "Same old story." D.J. No. 49, a letter of July 14, 1967, from Applicant's R. L. Paul to Mr. Daverman, rejects a Northern Michigan-Applicant interconnection as not being "mutally beneficial." In August, 1969, Wolverine renewed its recuest to Appli-cant for a reserve-sharing contract (D.J. No. 53). Ultimately, after the initiation of this proceeding, Applicant finally offered the M-C Pool a reserve-sharing errongement--but under the so-called " Holland" formula, which, as uc shall demonstrate, provides more of the form than the substance of genuine reserve sharing. This offer was reluctantly accepted by the cocps, and the arrangement is now in effect (D.J. No. 105
" replacement") */
*/ It seems clear that Applicant was fully aware of the IImitations of the Holland formula. There were discussions f in staff meetings of the role that the FPC (in the Crisp County case) was taking in assisting san 11 public systems in
(- obtaining reserve sharing arrangements (D.J. No. 50). A hondwritten note on page 2 of the memorandum reven1s the . comment, "The FPC ruling gives Crisp. County [ continued on next page) 151 m
/
4 Other of the smaller entities in the louer peninsula had similar experiences in attempting to work out reserve-sharing arrangements with Applicant. Mr. Earl Brush testified that in 1970 the City of Lansing asked Applicant for a Gainesville-type reserve-sharing arrange-ment--i.e., such as had been ordered by the Federal Power Commission to be instituted by the Florida Power Corporation between it and the City of Gainesville municipal system (Brush, direct, Tr. 2113) */ Applicant's first response was to tender the Holland formala, but Mr. Brush regarded this as totally inadcouate to Lansing's needs and rejected it ouickly (Brush, direct, Tr. 2111) . Lansing, a fairly size-able system, had sufficient bargaining power to hold out for a better arrangement. But the arrangement which Lansing ultimately obtained was still not as favorabic to it as the Gainesville formula would have been (Brush, direct, Tr. 2140) . In 1968, the municipal ayatem of Traverse City initiated efforts to obtain a rerefve- sh6 ring agreement with Applicant.
/ [ continued from page 1Sl] a better cieal than our present Holland contract." As of June 23, 1967, however, Applicant determined to stick with the Holland formula and to attempt to have it applied to other small utilities seek-ing reserve sharing (D.J. No. 50).
*/ At the time of Lansing's negotiatione uith Applicant, l
the FPC order had been reversed by the Court of Appeals (425 F.2d 1196 (5th Cir.1970)); but the Ccurt of Appeals decision had not as yet been overturned by the Supreme Court
~
(402 U.S. 515 (1971) , which reinstituted tLe FPC's terms for interconnection. ({ 152 .
As Mr. Joseph Wolfe, former director of the Light and Power Department for Traverse City testified: Q. . . . did you have any occasion to contact the Consumers Pouer Company to determine uhat arrangements might be available through that Company? A. Yes, I did. A. We have already considered some other plans, but we did hire Daverman Associates to make a comparison of the alternatives available to the City . .
. in order to arrive at a comparison, I reauested a meeting with the Consumers Pouer Company representatives.
Mr. Laverman and I did meet with Robert Paul of Con-sumers Power. This uas in early 1968. We recuested from them an interconnection agreement or an inter-connection arrangement. He were told at that. time by the Consumers Power people that there uere only (- two methods by which they could interconnect with
! us. Cne was their standerd wholesale participation purpose rate, PP-1 Rrte, which was strictly-a pur-chase, a one way arranger.ent. The otber uns an interconnection agrecment similar to that being offered to the City of Holland . . . and it was ebvious from examining the conditions and the formula involved with the reserve recuirement, that it would not have been advantageous to the City (Wolfe, direct, Tr. 1563-66)
In view of the unsatisfactory alternatives available l from Applicant, Mr. Wolfe chose to interconnect his system with the M-C Pool (Wolfe, direct,Tr. 1564). It seems clear that the complex Holland formula is nothing more than a complicated way of charging a monopolist'.s prien. l There are no technical or scientific principles which compel j specific pooling terms reached in a particular contract, l
- as was conceded by Mr. Slemmer in response to Chairman Garfinkel's cuestions (Slemmer, cross, Tr. 8930-31).
153
.s -
r 3 The plain fact is that in a market with imperfect struc-ture as the one in Michigan, where there are no coordinating alternatives for small systems such as the M-C Pool, Applicant l can strike a deal giving it more of the benefits from the transaction than it would obtain if those systems had somewhere else to turn to for power c:: change services. / This was
/ Q. Let's assume in Case 3 that A, B and C were not the only people D could deal with, but there were three other systems: E, F and G, that were approximately the same size as D. Under the basis would he choose--and they were all I interested in pooling with him. Under those circumstances l what would occur to the bargaining situation of A, B, and C7 A. A, B, and C would probably take into account the alternative that was available to D and perhcps offer a more , reasonable basis for sharing reserve, possibly the ecuni '
reserve approach. Q. Are you familiar with the contreet between Kentucky Utilities and the City of Paris, Kentucky? A. No, I'm not. Q. I want you to make this assumption: Let's assume that Kentucky Utilities was bargaining with the City of Paris and it was going to recuire the City of Paris to buy firm power with a ratcheted demand arrangement, a fifteen minute ratcheted demand arrangement. And Paris found that the East Kentucky Rural Electric Cooperative would offer to sell emer-gency power on an eaual percentage reserves basis. Then assume we find thct Kentucky Utilities, on Icarning of thic, agreed to interconnect and exchange power with Paris on an ecual percentage reserve basis. Would that be illustrative of the situation that would occur if system D had other alternatives ? A. .Yes, it would be. Q. And would the fact that A, B, and C would argue for their obtaining the greater proportion of the interconnection lua attributable to situations only where the other party to the interconnection had no other alternatives ? (_ A. That's true. (Lundberg, direct,Tr. c136-7) 154 s
specifically demonstrated with respect to reserve sharing when bk. Sicamer compared the results reached under the Holland formula, with the results under the Gainesville formula which generally prevails in nonmonopolistic bargaining situations. After interconnection on the Holland formula, according to Mr. Slemmer's own calculations , Holland could sell 1.5 mw more than it could isolated. If Holland interconnected on the Gainesville formula, it could sell 21 nu more of -firm power (Slemmer, crocs , Tr. 8983-84). It was in a similar background of control by major utilities over the access to coordinating services that the Supreme Court rejected claims by. Florida Fouer Corporation (Gainesville Utilities Derartment et . al. v. Florida Pcwcr Corp., 402 U.S. at 515) that the FPC's imposition on it of the equalized percentcge of reserves i;ormula was unfair. The Court stated: What Florida Power chosses to emphasize is the availability of- a certain amouht of pouer flowing from it to Gainesville is relatively more valuable to Gainesville 's small ::ystem than the availability of the same amount of power flowing from Gainesville to Florida Power. It is certainly true that the same service or com-modity may be more valuable to some customers than to others in terms of the price they are willing to pay for it . ( s
- s. 155
/ ,
But focus on the willingness or ability of the purchaser to pay for a service is the concern of the monopolist, not of a governmental agency charged both with assuring the' industry a fair return and with assuring the public reliable and efficient service, at a reasonable price. It should be noted, further, that even when Applicant was willing to contract uith the smaller systems in the lower peninsula for limited forms of reserve sharing, it insisted upon imposing a restriction upon these systems' interconnecting with any third party if doing so "might" result in Applicant's engaging in interstate commerce. */
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A necessary consequencd of this restriction was to limit the smaller systems' opportunities to broaden the reserve-sharing (" pool and thereby re. duce their reserve recuirements. D.J. No. 65,
- p. 2, relating to Applicant's own system, illustrates the desirability of broad scale interconnection, showing Applicant's reserves (as viewed in 1962) could be reduced from 24% of load to 19% by interconnection with Detroit Edison, to 15% ,
by further interconnection with Ontario Hydro and still further to 12.5% by interconnection with systems to the south.
*/ The following paragraph 11 in a 1967 contract (D.J. No.100) between Applicant and the City of Holland is typical:
Connections With others It is agreed that the electric energy.to be supplied by Consumers Power to Holland hereunder shall be used solely to meet a part of the recuirements of Holland in the operation of its electrical systen located in the State of liichigan. It is further agreed that without the written consent of Consumers Power, Holland shall make no interconnection with any person, firm, corperation, government agency or other entity which minat result in either party hereto becoming engaged, directly or indirectly, in the trans-mission or sale at wholesale [ continued on next page] 156 o
, 1 I
Mr. Brush. manager of the Lansing system, testified that Applicant's insistance upon this clause (in a contract between Applicant and Lansing effective through February, 1973) was very objectionable to him (Brush, direc% Tr. 2090; D . J . No . 91) . The record shows that in 1968 the consultant for the Northern Michigan and Wolverine G & T's discussed with Mr. Brush the benefits that might flow to Lansing if it interconnected with the M-C Pool. Subsecuent to the meet-ing, Mr. Brush was invited to attend a planning or operating < committee meeting of the M-C Pool in Grand Rapids to discuss the possibility of Lansing's either joining the pool or interconnecting with it. But the existing contract between
\- Applicant and Lansing precluded such interconnection (Brush, direct Tr. 2235).
Applicant claims that its motive for imposing restraints on further interconnection in its coordinating contracts was to avoid FPC jurisdiction * / and in support of its claim notes its recent abandonment of such requirements in
/ [ continued from preceding pagc]
of electric energy in interstate cctmerce. If Holland makes such an interconnection without such written consent, Consumers Power may, at its option, terminate this Agreement forthuith by giving written notice of its htention so to do.
*/ On direct, Mr. R. L. Paul claimed that no one had ever reauested permission to connect with another system and no such recuest had accordingly been denied, (Paul, direct Tr. 7942), claiming .in response to nuestions from Chairman Garfinkel that his knowledge was widespread on those contracts.
But when faced with a document shouing such a reauest and
.denial, he conceded that his previous answer was incorrect (Paul, cross Tr. 8076).
L , 157 .
its contracts (Paul, direct,Tr. 7942). In fact, houever, Applicant's interest in imposing that cim ce continued well after the time when it decided it was recuired to file its rate schedules with the FPC. Mr. Brush could not recall having been advised _ in the bargaining sessions with _ Applicant that jurisdiction of the FPC (which had been esserted prior to the bargaining sessions) */ obviated Applicant's need for the clause prohibiting " connections with others." He noted that Applicant made no suggestion to amend the existing contract (which 1csted through February, 1973) to delete the prohibition
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(Brush, direct,Tr. 2131). Uhile the Department does not deny that Applicant was strongly motivated to avoid FFC jurisdiction (as it successfully did through 1956), the evidence above raises serious doubts as to whether that was its sole intent or purpose in restricting third-party connections. Even if the initial or primary purpose of the clause was to avoid FPC
*/ Compare Mr. Jefferson's testimony,that Applicant had been filing its rates with the FPC since 1966, with Mr. Brush's statement that the prohibition cgainst connections with others lested through February, 1973, and .interferred with negotia-tions with the M-C Pool in 1968, long after Applicent had started filing its rate schedules with the FFC. D.J. No. 94 shows a February, 1967, contract betueen Boy City located near the hecd of Saginaw Bay for from any stcte boundary con-tained the restriction and that a 1971 acendment to a contract with Alpena Pouer failed to remove the prohibition of paragraph 9 in its 1966 contract betueen Alpena and Applicant. D.J. Nos.
100-103 show identical prohibition on connections with others . in effect in the Holland contract through November, 1971. m 158
i t
. 1
( ~ jurisdiction', another anticipated effect and the actual effect was to affect a preemptive coordination and block the future growth of the M-C Pool, whose growth was widely viewed as a challenge to Applicant's monopoly (D.J. No.186) .. e s e e 4 e ( D 4 l . I 159 - ! (- ~ . 4
- c. The "ffect of Aanlicant's Preemptive Coordination.
The effect of Applicant's preemptive coordinations were to raise barriers to the growth of the M-C power exchange. By offering power exchange services on terms just favorable enough to persuade another entity to deal with it, Applicant could block the growing M-C power exchange. The evidence shows it viewed Allegan's possible inter-connection with the M-C pool through Uolverine as a " danger" (D.J. No. 178), which it blocked by purchasing the Allegan system. Evidence also shows that the " prime reason" for its interconnection with Holland was its concern that if it did not, Holland would interconnect with Wolverine (D.J. No. 150). f
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- d. E Efo -: - to oreclude Fr.111 Sv.eten Particination in O .: ' i c;,i g r:0 Pool.
The record clearly shows that in addition to discourag-ing direct forms of coordination with small systems in the lower peninsula, it has attempted to eliminate the Michigan' Pool as a potential avenue by which small systems might attain coordinating advantages. In 1968, Applicant and Detroit Edison were considering some revisions to the Michigan Pool agreements. As indi-cated by D.J. No. 170-72, Applicant was very concerned that the amendments might result in " undesirable third parties" such as the menbers of the U-C pool, becoming eligible for participation in the pool. On August 19, 1958, Paul urote
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160
to persons drafting the Michigan Pool agreement supplement: I have reviewed the Draft No. 2 of the proposed Supplement E to the Power Pooling Agreement and wish to make the following comments and/or suggestions for your consid-eration. As you may or may not 2e aware, the group consisting of Northern Michigan and Wolverine Electric Cooperatives and Traverse City and Grand Haven municipal systems have just entered into a so-called new pooling cgreement. Since your proposed Supplement . E would extend pooling privileges to other pools, and since you do not attempt to define a pool, and since this so-called pool could probably meet the other limita-tions or criteria established in the Supplement, I feel that the Supplement would not meet our expressed goal to eliminate the possible pcrticipation of undesirable third parties. The only limitation seems to be included in Paragraph 7 which states that third parties to whom such pooling privileg.es cre extended must provide facilities to permit a mecningful and mutually cdvantageous inter-change of capacity and/or energy between itself and the pool. Since the wording mecningful and mutually cdvantageous is very genercl cnd sub-ject to vide interpretation, it is believed this paragraph ~will not effectively limit future participation by such third parties. I realize it may be difficult to write such a Supplement to exclude forever all such third parties but should we not cttempt at this time to establish some definite minimum standcrds or levels of mutual benefits that must be avail-able before third parties will be considered? Perhaps it vould be desirable to meet uith you to discuss this matter before proceeding further. ( D .J . No . 170) e e 161 W e e--
On September 11, 1958, Mr. R. L. Pcui said to Mr. Kaiser: */
*/ . Applicant, in es tablishing - internal company responsibilities and opercting procedure hcs cpperently institutionclized its differenticl- trectment of public versus private pouer. DJ 151, setting forth the position responsibilities of the. director of pouer pooling cetivities states:
[I]n the case of transactions involving other business-mcnc';cd electric utilities companiec, he shall be responsible for cl1 arrangements pertcin-ing to interchanges of electric energy. In the case of trcnsections involvin<t munici-peli".ies ene rurci alac tric coo 7 2re.c_. Jes 3.c car.li be nis en.:v ::o ec7: s e tae selen Derr:rcen: in nii D E P '~.O r T E i .* O* n" t o 01:0 s a '. O of electric energy. (empacsis ec6ed) Thus, in dealing with municipals cnd REA's, it cppecrc that Applicant's director of power pooling cctivities must- adv!:.e and receive input from c department dhich h'cs cs its "first goal . . . to acquire these systems." (DJ 18G , 'p. 3) 1
\
u e 162
/
Us I believe the criteria for third parties as presented in your letter of Septecher 5 to J. B. Falchee very cdequately covers the sub-ject and should help to prevent undesirable third pcrties from becoming a part of our present or any Euture pooling cgreement. I have no other comm2nts or suggestions to offer ct this time. (D.J. No. 171) The final decision uns not to put in anything. on third parties because of difficulties in drafting languese that would exclude the " undesirable persons." Apparently,it was - decided to omit any stated policy on admission of third parties, leaving that to the mutual agreement of Applicant and Detroit Edison. (D.J. 172, D.J. 71) In 1971 the Department of Jus tice undertoch an examination of the opportunity for third party participation in the liichigen Pool in connection with its antitrust review of a Detroit Edison Co. nuclecr poner plant application. In crder to obviate a Department recommendation of cntitrust hecring, Detroit Edison committed itself to exert its best efforts to modify the third-party membership provisions of the pool agreement so that third parties who m2t reasonable obj ective criteria .could be allowed to participate (Tr.1634-87). Applicant and Detroit Edison promptly cancelled.their 1952 power pool agreement and superseded it with a new arrcngement. Mr. Wolfe testified the new agreement, dated (m . 163 n wa
t i . May 1, 1973, had changed two key provisions of the cgree-ment to ma'ke them onerouc for small systems seeking to utilize larger units. (Uolfe, direct, Tr. 1684-93). The provisions for coordinated development were elimi-nated, and provisions were substituted changing the pricing method for capacity exchanges. Where the result of the old agreement was to price such e:: changes based on large scale units, the neu agreement priced based on the capacity costs of the least efficient units and high cost energy. The reserve sharing provisionc were changed from equal. percent reserves ar. a percentage of load, by adding another condition-requiring each party to maintain its large'st single unit
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of reserve, also onerous to small systems. The effect of these provisions chilled even further any request by a small system to join the Michigan Pool. While the small systems may have been interested in obtaining the advantages of the Michigan Pool, as a result of the foregoing and as a resultz of the provision for equal sharing so-called " grid lines" uithout regard to size, the burdens vould apparently more than offset any benefits (Wolfe, direct, Tr. 1684 - 93. )
- e. Chilling Small System hequests for More tonhITEicntoci Foine o Cdo6-idiWsti on .
+ .
An importcnt effect of Applicant's reluctance or out- , right refusal to join with the smaller systems in the elementary. forms of coordination, such as reserve sharing,
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164 nr y g . _ ,g , y u_ i , + . , . -y . % o. -- +, a
was to chill any realistic expectation that those systems could have had for the more advanced and sophisticated kinds of coordination. Mr. Wolfe of Traverse Citj explained that simple measures of operating coordination (such as reserve sharing) usually precede in time the more sophisticated pooling transactions involving various kinds of coordinated development: I think in the past it has been very common for - utilities to, first of all, to become inter-connected with the relatively simple agreement used in just an emergency or an agreement that
. provides for emergency pouer transfers _and then at some point in time to recognize the advantages of fuller coordination and enter into perhaps a limited pool type of arrangement * * * *
( Q. With respect to coordinating operations,- or coordinating planning, sir, would you.be more likely to find one rather than the other in the earlier type of agreement? A. I would say that initially it would tend to be coordinated operations and then progress to coordinated planning. < A. So, with that past experience it was natural for us to frame our own proposals or to visualize our own needs and what we might be able to obtain from Consumers Power Company would have to take into account, I would say in my opinion, their negative posture . . . the posture that Consumers had shown up to that time as with those [ unfavorable] interconnection arrangements with.small systems. Q. . . . Would it be realistic to expect a small system to frame a proposal for a sophisticated coordinated development?
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165
/ A. It would not be feasible at all, because as we testified earlier, coordination generally develops from a more simple arrange-ment to the more elaborate or more coordinated arrangement and generally coordinated opera-tion comes before coordinated planning. Q. Would you consider arrangements for participation in a generating unit in the baseload generated unit with the more sophisti-cated type of arrangement, as compared with an emergency power arrangement? A. Yes. (Wolfe, direct, Tr. 1609-1614)- Since the smaller systems had been rej ected in their requests for coordinated operations, it is not surprising that this chilled specific requests for coordinated develop-men t. Such requests, including particulcrly. requests for
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access to participation in nuclear units developed for regional loads, quickly appeared when it became knopn that antitrust revicu provisions of the Atomic Energy Act of 1954, as amended in 1970, (42 U.S.C. 2011) would open opportunities for these arrangements. Q. What promp ted that50][the fo'r coordination in D.J. Mo. , Mr. request Wolfe? A. . . .1971 is the period of tima in which a decision was made by a number of parties in Michigan to intervene in the l'idland antitrust hearing, and it uns felt thet these particular requests should be documented and made clear fcr the record that we ucre, 1.n fact, asking for consideration of these items. Q. How did you first learn of any rights you might have had, legal rights to do the things that apparently you may have wanted to do? 166
# e
/ A. As regards the Midland Muclear Plant? Q. Yes. A. Well, I became cucre of the change in the Federal 1cw which required thct applicctions for construction of nuclear plants would require a revieu by the Justice Department to consider cny antitrust implications about the time that the law was changed. But it was not clear at the time what the rights o f the parties like Traverse City or small systems might be, except there was some specula-
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tion in the industry. I think, at the time. But it uss not until later thet--I think thct chcnge in the lau was in 1970, cad it was not until in 1971 uhen the Justice Department mcde cn investi-gation of this cpplication that v:e began to become~ increasingly cucre of some of the possible rights that us might have under the 1cu. And it uns ct that time that we had consider-(^ able discussion cmong ourselves and uith legcl i counsel regarding ccme of these provisions and rights and secrted to attempt to obtain them. (Wolfe, direct, Tr. 1624-25)' D.J. Nos. 22, 24, 25, and 27 all reflect the desires of small systems in Michigan to obtain access to the full rcnge of opportunities in the power enchange market. Except for acknouledgements of their inquiries, e.g. , D.J. No. 23, Applicant's first response to these inquiries which date from 1971, uns the statement of 'Alphonse Aymond on the witness secnd on February 12, 1974. 4 i 167
l/ 5. The Inability of Applicant's Competitors in the Louer ( Peninsula to Obtain Access to Regional Power Exchange Services Seriously Impairs Their Long-term Competitive Position Professor Hein outlined the deleterious effects on smaller systems of their being denied access to the recional pcwer exchange as follows: In my opinion, access to the pool enhanced the competitive ability of both CFCO and DE to compete in both the retail and wholesale markets in khich each company operates; conversely, the inability of other electric utility firms to gain access on the same terms gcVerning CPCO and DE - severely limited the ability of these firms to compete with CPCO and DE, and further weakened their very ability to continue to generate power to supply the markets in Which they distribute electricity. . . These results flow from the fundamental consequence of ' pool' operation, which is to lower the total cost per 13G1 in the generation of electric power. (_ s The consequences for small electric utilitics are not difficult to sec. If they cannot engage in the bulk energy exchange market--if, in short, access to pools and coordination is denied them on equal and equitable terms, they will fall further behind in the competitive struggle. . . The gap between their costs and those of the larger companies will grow (Wein, p.d. , pp. 60, 65). That such a " gap" exists is suggested by Dr. Pace's own study of the independent sector of the wholesale firm supply market vraich shows that in the competition against thermal self-generation Applicant's market share doubled frca 127. to 24% in the period since 1960. (Pace, cross, Tr. 7421) At least two canicipals (Petoskey and Charlevoix) abandoned self-generation; none entered. (Westenbroek, direct, i' Tr. 953-54, 956-57) 168
In the fol'owing section, we will discuss the adverse effects upon these smaller systems under two categories: (1) the consequences of not being able to add economical large-scale generating units; and (2) the risks of being dependent upon Applicant for bulk power supply provided under its wholesale rate schedules.
- a. Consequences of Not Owning Huclear Generation For a small private system such as Alpena Power, the consequences of exclusion from access to regional pouer-exchange services are slightly different in degree and kind than the consequences to a municipal or cooperative utility:
A small private system such as Alpena Power has no tax and financing advantages to offset against the disparity in ( bulk pcuer production costs created by Applicant's monopo-listic conduct. Ccnsequently, as long as such conduct continues, Alpena will be under increasing compulsion to purchase its bulk power supply rather than construct its own generatf.on. This will deprive Alpena, which is in the business of selling power (Fletcher , direct, Tr. 4261) of the opportunity to invest in its own generation and earn a return on that investment. */ Mr. Fletcher testified that
*/ Alpena is closely held and appears to have no diffi-culty obtaining equity capital,but for small private systems which are publicly held and dependent upon attracting equity capital in the market the limitation upon the oppor-tunities for grouth by investment in generation may sub-stantially impair their ability to attract capital at Cf. IIcw Encland Electric System, S.E.C.
competitive rates. Administrative Proce'Ecing do. 3-1o98, initial Decision dated July 7, 1972. pp. 38-39.
, 169 '
( Alpena had a strong interesu in the outcome of this proceeding and indicated that its major goal was to obtain ownership 'of a portion of a large-scale generating plant. ' (Fletcher, direct, Tr. 4270). Mr. Fletcher explained: Well, I said yesterday that we have two major objectives at Alpena Power. One of them is to serve the people in our service area as cheaply as possible; the other one is to make the best return on investment that we can, that is allowed. (Fletcher, cross, Tr. 4336-37) Municipal and. cooperative systems get special benefits from investing in generation since they have certain tax and financing advantages, which, all other things being equal, should make it cheaper for them to produce their own power than to buy it at wholesale from a private system. (Helfman, cross,Tr. 3451-54) Without access to the regional power exchange to construct nuclear power, however, they lose the opportunity to pass all or part of t.hese savings onto their customers. (Westenbroek, direct, Tr. 1002-03) The small' systems are likely to lose all of these sav-ings. Systems such as Lansing, which can install 160 mu units , on an isolated basis, lose part of their savings that could be achieved if they were to apply their municipal financing l to the construction of larger fossil fuel or nuclear genera-l tion units.' ' A second consequence that flows from inability to install large-scale generation is the loss of opportunity for the r independent systems to e::ercise control over costs. ( m 170
Professor Hein pointed out that most rate regulation by utility regulatory commissions is static rather than dynamic and cannot make a utility operate efficiently. (Wein , p . d . , pp. 313-33) Such regulation attempts to eliminate monopoly profits, but generally has little effect on monopoly wastes. Mr. Brush of the Lansing system testi-fied that ability to control costs played an important part in Lansing's decision to own generation rather than to buy wholesale power. Mr. Brush would also prefer not to leave an important part of his system's costs up to legal pro-ceedings before the Federal Power Commission. (Tr. 2286, 7) Not only does the inability to install large-scale
- generating units effectively deny Lansing and others the
'(' opportunity to exercise control over their costs, but also it renders them incapable of setting a ecmpetitive yardstick by which Applicant's cost of producing power can be measured. The lack of such a yardstick both hinders efforts by regula-tors effectively to control a utility's costs and impairs the bargaining position of small systems which are consider-ing the alternative of wholesale power purchase. Mr. Rogers, the power engineering expert who testified for the intervenors, explained the importance of the latter factor:
- 1. . . . Uhat we would do -- and again I add, this was some years back when this method was employed. He would study the cost of build-ing an isolated system to determine whether or not the uholesale customers could do it cheaper than the price at which they were then purchasing
( from the large privately-owned company 171
1 Then we would initiate negotiations writh ' the company on rate without giving them the bene-fit of the study to determine whether or not they would be willing to sell at a louer price or a higher price. If they came in with a higher price, then we j would attemot to obtain financing and build a system to serve th' ewholesale customers.- 1 Q. In other words, the alternative of self-generation was at least a factor in obtaining lower-cost power for these systems, would you say? A. There is no question it was the most impor-tant factor. Q. Would this method or technique be viable today? A. No, sir. Q. Why is that? A. Because the size of units that can be economically built today, base load units such as Midland, for instance, are so often no longer feasibic for a f w small wholesale customers. Additionally, you have the problem with transmission lines. It is rather unthinkable today that you would go out and, for the most part, dupli-cate the transmission services that could be per-formed, perhaps with slight modifications, by existing transmission facilities of other utilities already in existence. (Rogers, cross, Tr. 5997-98) Another important consequence of excluding small ' systems from generation is to impair innovation in power production. Thus, for example, Mr. Rainson of- the Holland system has done some pioneering work in the development of coal scrubbing technology and indeed has offered to make this technolog available to Applicant. (Rainson, direct, Tr.' 3196) In view of ts recognized advantages of a diversity of approaches in advancing i
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172
# e
technological frontiers, ir would be unfortunate if only a few largest systems in Michigan were in a position to contribute to the development of more economical and less polluting power production technology.
- b. The Risks of Relying upon a Competitor for Bulk Power Supply ,
Applicant appears to contend that the demonstrated inability of small systems in the lower peninsula to parti-cipate in the regional pouer exchange and thereby to install large-scale generation would not establish a " situation incon-sistent with-the antitrust laus" because these systems have the option of purchasing uholesale power from Applicant on terms regulated by the Federal Power Commission. Thus Dr. Stelzer testified: Q. Would access in the form of wholesale purchases be adequate? A. . . . Yes--if wholesale rates are regulated on a cost basis so that they do not yield monopoly profits and are not discriminatory in character, and if the terms at which uholesale is made avail-able--number of delivery points, etc.--are subject to regulatory review. It is the ability of a , dominant seller to deny reasonable access to his olicy product not which isofinconsistent the presence of antitrust une::erciseabic power. p(Stelzer, p.d., p. 29-30) Uc suggest, however, that, notuithstanding the e::istence of FFC wholesale rate regulation, reliance solely upon whole-sale purchases from Applicant would create a number of sub-stantial risks to the competitive viability of the small systems in Applicant's area. 173 .
First, we need to reiterate that Applicant expressly declined to announce a corporate policy of selling whole-sale power, upon request, to new entrante, in retail distribution. Moreover, Applicant is not subject to any utility obligation, under the Federal Power Act or any other regulatory statute, to make such sales. Thus a municipality uhich is seriously considering establishing a municipal distribution system could not count on the availability of a firm bulk power supply from Applicant. e d' 9 i b i 174
A second risk for the small systems in relying upon wholesale purchases from Applicant is that Applicant has a great deal of discretion as to the manner in which it prices its services notwithstanding the existence of FPC rate regulation, and can exercise that discretion to impair the competitive position of its wholesale customers.- The area-of discretion is in pricing uholesale power supply at louer than average system cost. Applicant's chief executive, Aymond, testified that when the Midland Units come on line.it is anticipated that they will produce power at a lower cost than average systen cost. (Aymend, cross, Tr. 6646-47). Where a utility desires to do so, the FPC will permit it to price power down to its long-run marginal costi but it will not comoel pricing below average systen cost. In St. Michacis Utilities Commission. et al, 35 FPC 591 (1966) and Southwest Public Service Comonny, 33 FPC 343 (1965), the FPC permitted a large utility to price wholesale power below average cost-if it wanted to, where the effect of the transaction tgas to keep a small utility from installing small unit, inefficient generation. On the other hand, where the FPC was requested to require long-run marginal cost pricing, in a case where the large utility would not voluntarily offer it, the Commission held that it lacked the authority to do so. Alabama Elcetric Coco.. Inc. v. Alabama Pouer Comoany, t. 38 FPC 962 (1967). - s_ 175
By pricing its power supply below the cost of an expansion program to an isolated small utility, Applicant could, in the case of a small private or municipal system, insure that it will be economically unattractive to construct and own power production facilities. */ When the threat of self-generation has passed, Applicant could return to average system cost as its basis for wholesale ratemaking. While the record does not disclose that Applicant had a general policy of pricing below average cost to deter self-generation, **/ one instance of this strategy is indicated by D.J. No. 188. In an internal explanation of Applicant's policy on wholesale sales to smaller systems in its area, Mr. Paul mentioned the great efforts Applicant had. made to head off the G & T's from expanding their generation. He then stated:
*/ If the desire for control of bulk power supply is strong enough, a small private or municipal system may choose some-what higher cost for power supply. But as the gap increases, self-generation may simply become impractical, as apparently it has recently become for Petoskey and Charlevoix. Generation and transmission cooperatives have no such choice. If Applicant can establish that its offering price is below the cost to the G & T of constructing its own power supply, the Rural Electri-fication Administration under its present policy will not permit a Rural Electric cooperative to finance and construct its own power supply (REA Bulletin No. 20'6; D.J. No. 7).
**/ This is confirmed by a statement of Mr. B. G. Campbell lii a letter to Southeast Coop (D.J. No. 119)'. "It should be clear to you that rates vary among utilities depending on cost of service and other factors including policy. It is not our policy to sell power even to rural electric cooperatives below cost." ,
6 176 l l l
With the decision made to proceed with addi-tional generation, Consumers Power withdrew our special rate oronosals and informed the two G & T cooperatives and the Southeastern Michigan Rural Electric Cooperative that we were cancelling their existing contracts. It was indicated, however, that if the cooperatives wish to continue their existing connections with Consumers Power Company, new contracts would be negotiated on our then new standard wholesale rates. (D.J. No. 188) (Emphasis added) Even Dr. Pace conceded that if the FPC could not compel the institution of the lower long-run marginal cost rate, AEC's compelling the sale of nuclear power at the cost of the new units would not be inconsistent with the public interest. Q. Under those circumstances, would you favor this Board compelling Concumers Power to sell, say, unit power from nuclear units or comoel equity participation, even though that woul'd result in the small municipals obtaining power at below average cost? A. Well, I think the best ansuer that I can give is it uould be consistent with the public interest, in my vieu, given all the assumptions here chat we've talked about, if the municipalities otherwise clearly would generate pouer at, let us say,15 mills or whatever the relevant number is, and if Consumers' average-cost-based wholesale rate came out, under identical circumstances, to, let's say, 20 mills or something of the sort, if it is the case that the long-run incremental is below the average and it's sufficiently below so that Consumers Power Company can shave a rate to 14.9 mills, to induce the municipality not to engage in inefficient generation. What you're really talking about there is an incremental cost-based wholesale race. I would think that that would not be inconsistent with the public interest. (Po e, cross, Tr. 7534) Under the relief which the Department of Justice is , proposing in this case, the small systems would have the opportunity to obtain access to bulk pcwer with which to 177
meet their growth at levels down to Applicant's long-run marginal cost by access to coordinated developments of
- nuclear power. This would remove from Applicant much of the power it currently has to frustrate entry into self generation for systems who seek an independent source of bulk power supply. -
Small systems which depend upon a competitor for bulk power supply also run the risk that their supplier will l exercise its pricing discretion to put them in a " price squeeze." This occurs when a small system is obliged'to pay wholesale rates based upon its supplier's average system costs and then finds itself in retail competition with that supplier, uho is offering retail (" promotional") rates set at lower than average system cost. A price squeeze creates a particular difficulty in competing for large industrial loads, as where distribution expenses involve a relatively small portion of total costs and bulk power costs involve a relatively large
/
portion. . There is only limited evidence that Applicant has actually exercised its power to put its wholesale customers in a price squeeze, */ but the potential risk is continually present. M /
*/ D.J. No. 162 shows a $9,000 per loss fcr St. Louis if it Eought at wholesale from Applicant and supplied Michigan Chemical Co. at retail. ,
**/ "[Mlonopoly power, whether lawfully or unlaufully acquired ma vfolate 52 of the Sherman Act though it remains unexercised . . .
. The existence of power 'to exclude competit.fon when it is desired to do so' is itself a violation of 52 provid 3 it is coupled with the purpose or intent to exercise that pou x ," U . S . v . Parnmount Pictures, 334 U.S. 131, 173 (1948) [ interior citations omittea). 4 178 i .
, . - ..n , . - - - ,, , , ,
Alpena Power Company was particularly susceptible to price squeezing since approximately 52% of its load was developed from sales to Huron Portland Cement Company and three other industrial customers (Fletcher, direct, Tr. 4258). In a previous contract it had been able to obtain a clause (paragraph 12-B) protecting it against price squeeze: in any change in its retail and wholesale rates, Applicant was required to take into account the relationship between the two so that Alpena could buy at the wholesale rate and sell in competition with Applicant's retail rate and still make a profit. Although, as the testimony of Mr. Fletcher made cleer (Fletcher, direct, Tr. 4261-3), Alpena regarded paragraph 12-B (. s as a very valuable protection; it had insufficient bargaining power to insist upon its retention in subsequent contracts, and it was removed despite Alpena's strenuous objections (Fletcher, direct, Tr. 4261-65). Both Dr. Stelzer and Dr. Pace appeared to recognize that a price squeeze could subject the wholesale purchaser to a serious disadvantage, but they contended that the regulatory agencies would prevent that disadvantage from actually develop-ing. Thus Dr. Stelzer testified: Q. .. . Wouldn't the utility have-an incentive in each case uhere there was elasticity in demand for the output of the firm to price down [to] the marginal cost, whether or not there uas a savings
..n resources?
A. Yes, it would. That's why we have regula-( tion. 179
Q. Yes, sir. And if he could persuade the regulators to permit him to do that, eculdn't he have a com-petitive advantage over the small utility whom he is selling to at his average cost? A. If he could persuade the regulators not to do their job, he would have an advantage. (Stelzer, cross, Tr. 6875) Dr. Pace gave a similar answer at Tr. 7453-4. . Specifically, Dr. Stelzer ascuted that the disadvantage . could and would be taken care of by the regulator's compelling sales at lover than average cost to permit the smaller utility to compete in the same retail market as his supplier: A. In that circumstance I would think that the impediment to efficient pricing uould be the r - restriction of the small utility to purchasing. only at the system aversge cost. ( But if there werc a segment of the small system's load which were demonstra'cly demand elastic, in the type of elasticity that ne beve discussed, and it could get the business if it could get doun to incremental cost--including the 10 mills as incremental rather than 15--that in those circumstances since it could thereby also benefit its large supplier by helping it move down the cost curve: in those specific circumstances it should be able to get power to serve that market a t incremental cost. Q. Do you know, then, whether or not either Federal or state regulatory agencies teke into account price squeeze in reaching decisions 4 on rates? Q. . . . Based on your knowledge, do they take into account the question of price squeeze? A. Yes. (Stel=er, cross,Tr. 6794, 6074) { m 180
s It is evident, however, that Dr. Stelzer was, at best, overly optimistic in his assumption that the regulator of the wholesale rates (uhich happens to be the Federal Power Commission) would take action to eliminate the rate disparity. In fact, in a nuniber of recent cases, */ the Federal Power Commission has squarely held that it has no jurisdiction to deal with such a price squeeze; and it now rejects evidence with respect to that issue. .The question whether the FFC is correct in this interpretation is now pending in the Courts of Appeal. ** / . We have outlined above the substantial risks to uhich a smaller system subjects itself when it becomes dependent upon its ccmpetitor for bulk power supply. In the light of
. that, Applicant is surely wrong in suggesting that the existence of Federal Power Commission wholesale rate regula-tion obviates any concern uhether the smaller systems in the
*/ Cases in which the FPC has stated its lack of jurisdiction to regulate price squeeze include Southern Californic Edison Co., Docket No. E-8176, Order-of September 21, 1973; Florica Power & Light Co., Docket No. E-8008,.04ders pf November 21, 1973, ana January 21, 1974; Union. Electric Co., Docket No.
E-8215, opinion of January 7, 1974; Commonwealth Edison Co., Docket No. E-7587, Cpinion 681 (Jan'unry 7, 1974), Public Service Co. of Oklahoma t Docket No. E-8242 (February 28, 1974); Pacific Gas & Electric Co. , Docket No. E-7777 (March 14,1974); Wisconsin electric Co., Docket No. E-8619 (April 19, 1974); ano arkansas Power 6 Licht Co. , Docket No. E-8250 (Oct. 29, 1973).
**/ Cases presently pe.. ding in the Courts of Appeals include No. 7a-2207, Convav Corp. , et al v. FPC (Arkansas Power & '
Llg'ht Intervenor), No. 74-1411, Clties of Batavia. et al.
- v. FPC, and Nos. 73-2173, 73-2255, City or Anaheim et-al v. '
.\ s. FPC. and Anza Electric Cocoerative v. FPC, Eo. 74-1371 U tixitIier.
' Con dission of New Smyrna iiench v. FFC. (Footnote continued ca next page.) _
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181
lower peninsula have a direct opportunity'to obtain access to power exchange services and install economical gaaeration. Indeed, the uncertainties and risks we have explained provide further justification for imposing relief which will assure these small systems the opportunity to obtain needed power exchange services and to install large scale generating capacity through plans of coordinated development. s
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**/ (footnote continued frca preceding page)
In a fif th case, Electrb Cities 'of North Carolina, et al, North Carolina Electric Eemocranio Corocration, ec al v. F. P. C., D.C. Cir. Ros. 73-1185,-73-1277, cecision nas.bcen stayco pending completion of settlement negotiations. In the FPC initial decision, Duke Power Company FPC Docket No. E-7557 (February 2, 1972) at page 18, the administrative law judge said: Moreover, it would be improper for this Commis-sion to usurp the functions delegated to a sister agency, the Atomic Energy Commission. 68 U.S. Stat. 938; 42 U.S.C. 2135. The latter has now before it certain pending proceedings in which the reauest of certain municipalities to share in the ownership and output of Duke's proposed nuclear plants and the weight to be given to the policies of the antitrust laws are under consideration. [ Duke Power Company, Oconee Units 1, 2 and '3, AEC Docket Nos. 50-269A, 50-270A, and 50-287A] 182
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- 6. The Statutory Test: Situation Inconsistent with the Antitrust Laws
- a. The Standard of " Inconsistency" Is a Distinct and Lesser _9tandard Than "Viointion."
As a major component of its statutory finding, the Board must determine whether a situation inconsistent with the anti-trust laws presently exists in Applicant's area of lower Michigan. The test is inconsistency with the antitrust laws, not violation of those laws. The Report of the Joint Committee on Atomic Energy on the 1970 amendments to the Atomic Energy Act elaborates upon the standard to be cpplied under this test of inconsistency: The concept of certainty of contravention of the antitrust laws or the policies c1carly under .. lying those laws is not intended to be implicit in this standard; nor is mere possibility of inconsistency. It is intended that the finding be based on reasonable probability of contra-vention of the antitrust laws or the policies c1carly underlying these laus. S. Rep. No. 91-1247; H.R. Rep. No. 91-1470, 14, (1970). Two points stand out: (1) certainty of contravention of the' antitrust laus is not required; and (2) a finding of incon-sistency may be based on the contravention of policies underlying the antitrust laws. The necessary conclusion is that the icvel of proof required to show inconsistency with the antitrust laus is 1 css than what would be required to establish violations of those laws in the courts. , The Supreme Court, in Northern Pccific Railroad v. United States, 356 U.S.1 (1958), set forth .the underlying principles 7 ( , 183
of the Sherman Act and it is. against this national commitment to the maintenance of unfettered competition that the consistency or inconsistency of the situation in Applicant's area must be measured. The Sherman Act was designed to be a compre-hensive charter of economic liberty aimed at prcscrving free and unfettered competition as the rule of trade. It rests on the premise that the unrestrained interaction of competitive forces will yield thc bett cllocation of our economic resources, the lowest prices, the highest quality and greatest material progress, while at the same time providing an environment conducive to the preservation of our demo-cratic, political and social institutions. But even were that premise open to questien, the policy uneauivocally laid down by the Act is comoeti tion. And to ents end it prohibits
'Every contract, combination . . . or con-spiracy in restraint of trade or commerce among the several States.'" 356 U.S. at 4 and 5.
[ Emphasis added] Even conduct by Applicant which fails to rise to the level of a violation of the antitrust laws may nevertheless support a finding that there is a situation existing in Michigan's lower peninsula which is inconsistent with the antitrust laws. d . f
%s 184
/ \
Section 105, unlike the Sherman Act, contains no crimi-nal penaltics and attaches no legal censure to the conduct under scrutiny. Rather Section 105 directs the Atomic Energy Commission to insure that the publicly financed invest-ment in nucicar generation will be utilized in a manner con-sistent with the antitrust laws and the competitive policies underlying those laws. Moreover, to construe the test of
" inconsistency" as synonymous with " violation" or arising from a violation would do violence to the plain unambiguous language of the statute and render meaningless Section 105(a),
(42 U.S.C'. g 2135(a)) of the Act.
- b. The Evidence Establishes a Violation of the Antitrust Laws and a fortiori the Enistence of a Situation Inconsistent with the Antitruct Laws.
In any event, we submit that the evidence presented in this hearing is sufficient to warrant a finding that Applicant has illegally monopolized the bulk supply and Sholesale-for-re' sale firm power market in its area of lower Michigan in violation of Section 2 of the Sherman Act and thus clearly suffices to establish the existence of a situation incon-sistent with the antitrust laws. Section 2 of the Sherman Act reads as follows: Every person Who shall monopolice, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several states or with foreign nations, shall'be deamed guilty of a ,' misdemeanor. 15 U.S.C. 2 ' \s 185 1g --. , _ _ ._
Illegal monopolization violative of Section 2 consists of monopoly, defined in economic terms as the power to fix prices or to exclude competition, coupled with policies de-signed to use or preserve the monopoly power. A recent Supreme Court definition of the offense appears in United States v. Grinnell Corn., 384 U.S. 563 (1966): The offense of monopoly under s2 of the Sherman Act has two elements: (1) the posses-sion of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguiched from the growth or development of a superior product, business acumen or historic accident.- 384, 570-571.
- i. Monopoly power In Grinnell, the Court said monopoly power could be
( inferred "from the predominant share of the market." 384 U.S. at 511. The firm bulk power market (which includes both bulk power supply within Applicant's vertically integrated system and wholesale supply to independent distribution systems) in Applicant's area of lower Michigan is a relevant market. The product market is firm power in bulk for use by distribution systems. The geographic market is the area Applicant serves or could feasibly serve. Applicant's share of the market so defined by product and geography is 85 percent. D.J. 197 */
*/ 1970 - 84.8 1971 - 85'.4 ',
s_ 186
, This percentage of the relevant market is sufficiently large to permit the inference of monopoly power under case law. American Tobacco Co. v. United States, 328 U.S.
781 (1946)--68-80%; United States v. United Shoe Machinery Coro. ,110 F. Supp. 295 (D. Mass.1963)--75-85%. We do not, however, rely on market share alone to establish Applicant's monopoly power in the firm bulk power market. We have noted that Applicant owns and controls nearly all the high-voltage and entra-high-voltage transmission in its general area and thus has the power to grant or deny other systems access to coordination. Access to coordination--the ability to enter into the kinds of transactions carried out in the regional power exchange market--is prercquisite to the ability to compete effectively in the firm bulk power market. Thus Applicant's power over transmission carrics with it the power to exclude competitors and potential competitors from the wholesale-for-resale market. Monopoly power derived from control over transmission was present in the Otter Tail Power Co. v. United States, 410 U.S. 366 (1973) case. Otter Tail's dominance over transmission and subtransmission gave it the power to exclude potential municipal systems from the retail distributida market. In that way Otter Tail ' controlled their access to power supply. In the instant proceeding, Applicant controls the access of other bulk power supply / systems to the coordination necessary to produce low-cost k competitive bulk pouer supply. 187
i
- 11. Intent to monopolize The second element of monopolization, according to Grinnell, is willful acquisition or maintenance of monopoly power. While substantial evidence of specific anticompeti-tive intent has been shown above, the law is clear that the element of wi11 fulness can be established without a showing of such anticompetitive motivation. The Supreme Court has stated:
The anti-trust laws are as much violated by the prevention of competition as by its destruction. It follows a fortiori that the use of monopoly power, however laufully acquired, to foreclose competition, to gain a competitive advantage, or to destroy a competitor is unlawful. .. And even if we canume that__a suecific intent to acc ora,1:i.sil ence result is aosent. ne is charnenble in ic<-:n1 contcantation uita tnat turnose since the ena result is tne necessary cna oirect con-secuence or uhat ne cia. United States v. Griffith 334 U.S. 100, 107-6 (1948)-{ Emphasis coded). Of particular relevance to the question of intent is Judge Hand's opinion in United States v. Aluminum Co. of America,148 F.2d 416 (2d Cir.1945), a case which was very much in the minds of the framers of the 1954 Atomic Energy Act. */ Judge Hand rejected Alcoa's claim that its market position was due to the skill and initiative,with which it conducted its business and that it should therefore be com-4 mendad rather than censured: ( */ 83d Cong., 2d Sess., Joint Committee on Atomic Energy Hearings on S. 2323 and H.R. 8862 to amend the Atomic Energy Act of 1946, Part II, pp. 441-443, 495-98, 629, 641-642, (June 1954). 188
This increase and this continued and undis-t turbed control did not fall undesigned into Alcoa's lap; obviously it could not have done so. It could only have resulted, as it did result, from a per-sistent determination to maintain the control, with which it found itself vested in 1912. There were at least one or two abortive attempts to enter the industry, but Alcoa effectively anticipated and fore-stalled all competition, and succeeded in holding the field alone. *** We need charge it with no moral dereliction after 1912; ue may assume that all it claims for itself is true. The only question is whether it falls within the exception established in favor of those who do not seek, but cannot avoid, the control of a market. It seems to us that that question scarcely survives its statement. It was not inevitable that it should always anticinate increases in the demand for ingots and b'e prepared to supply them. liothing compelled it to keep doubling and redoubling its capacity before others entered the field. It insists that it never excluded competitors; but we can think of no more effective exclusion than progressively to embrace each new opportunicy as it opened, and to face every newcomer with new capacity already geared into a great organization, having the advantage of experience, trade connections , and the elite of personnel. Only in case we inter-pret ' exclusion' as limited to =cnoeuvres not honestly industrial, but actuated solely by a desire to pre-vent competition cap such a cour.se, So to 1Dnit itindefatigably pur-sued, be deemed n,ot exclusionary'. would in our judgment emasculate the Act; would permit just such consolidations as it was designed to prevent. 148 F.2d 416, at 430-31 , It may be contended that Applicant, being a public utility, has an obligation to anticipate and provide for increases in demand and that thus Alcon is inapplicable. He disagree. Applicant's public utility responsibility extends solely to retail service in its existing service area. It had, for example, no obligation to purchase the Allegan and Grayling municipal systems; to submit proposals to acquire the Charlevoix, St. Louis and Traverse City municipal systems; to extend its transmission and distribution facilities to 189
preempt snrvice territory, nor to engage in preemptive coordination uith the City of Holland. More importantly, Applicant has no utility obligation to furnish wholesale power to new entrants. Thus, whatever distinction there may be between Applicant and Alcoa is limited to Applicant's retail operations. iii. Exercise and maintenance of the power We have previously shown that Applicant's present system is the result of a great many mergers and acquisitions of previously independent power systems. (Wein, p.d. 51-52) As a result, Applicant now is a system of large size with control over many generating stations. This gives it access to cmergency power from a large number of diverse sources within its own system. Notwithstanding this, Applicant has ( quite properly concluded that it must coordinate its opera-tions and development with even more diverse sour 6cs in order to be able to utilize large scale units, particularly nuclear units, without raising its required reserves to an impractical level. Thus, in 1962 Applicant and Detroit Edison formed the Michigan Pool. And, in 1964 Applicant's engineers noted that it would be necessary for Applicant to have large third party interconnections before nuclear units could be installed. (Int. no. 1005, Deposition of Harry Wall, p. 36-37; Lundberg, cross, Tr. 9049; pp attach J.R.L. p. 1) */ These were
* / Aoplicant, of course, as a technical matter could "go it alone" by increasing its reserves to 40%, but this hardly seems practical from an economic standpoint for a system of its size.
190
achieved in 1970 by ehv ties to the MII0 systems. In light of Applicant's own great diversity of sources of emergency power within its own system plus the sources available to it fram the systems of others to which it is intersonnected, the small amount of additional emergency power that vould become availabic to it by entering into contractual arrangements with a small system would cake little difference to it in reducing its percentage of reserves. Mr. Mayben testified how this adversely affects the bargaining position of a small system attc=pting to arrange for reserve sharing with Applicant. (Mayben.. direct, Tr. 2632-2633) The very sane principle also affects the bargaining between Applicant and small systems in negotiations for coordinated l development. Applicant, supplying firm bulk pouer to its own distribution properties in 150 communities and in rural areas with their large amounts of load grouth each year, would benefit little by small additional increments of load so far as increasing the size of units it could install, while the small system being able to utilize a portion of a much larger unit by coordinating its development with Applicant would be greatly aided. Accordingly, Mr. Mayben testified that the benefits of value of the pouer exchange transaction to the small system would be much larger than to Applicant. What is of significance here is that his analysis did not stop at that point. He further shoued th't-by virtue of - Applicant's pouer pooling contracts for reserve sharing and km 191
coordinated development with Detroit Edison (denominated the Michigcn Pool) and the reserve sharing contracts of the Michigan Pool uith Ontario Eydro and the MIIO systems, its
- bargaining position is made still stronger (Mayben, direct, Tr. 2656, 2690). These contracts, as noted, are 'vir_-_ _
tually indispensabic to Applicant's installing nuclear units. In addition they further strengthen Applicant's hand in bar-gaining with small cystems in its area. With its arrangements for pool units with Detroit Edison, Applicant could use nuclear power, uhether or not any small system participated in the arrangement. The converse is not true. Without an arrangement for coordinated developnient uith Applicant, * / small systems could not use nuclear units. Accordingly, arrangements for ( coordinated development with Applicant became of great value to the small system because Applicant's dominance over trans-mission does not allow tha small system to perfect other arrangements for coordinated development. Mr. Mayben testi-fied how this would farther adversely affect bargaining for. access to coordinatica betueen small systems attempting to negotiate an interconnection with Applicant. (Mayben, direct, Tr. 2690) These facts illustrate the long-recognized principle that there, is "a potency in numbers," a principle quoted with
*/ Assuming no uheeling. Mr. Helfman's Case IV shows one F03 mw coordinated development was attainable uith wheeling over Applicant's transmission system.
192 4 ,, y -s 5 *- r-v-9
approval and emphasized in Northern Securities v. United States, 193 U.S. 197, in Which the court restated, "There is a notency in numbers when combined Which the law cannot overlook where injury is the consequence. Morris Run Coal Co.
- v. Barclav Coal Co., 68 Pa. St. 173, 186."
Applicant improperly utilizes the strength that it has on its own and adds the strength it obtains as a result of its coordinations with Detroit-Edison, the MII0 systems and Ontario Hydro to obtain undue bargaining power in its dcal-ings with small systems in the lover Michigan peninsula. As the Supreme Court noted in Cainesville Utilities Dent. v. Florida Power, 402 U.S.~515 (1970): 4 It is certainly true that the same cervice or commodity'may be more valuable to some customers (- s than to others, in terms of the price they are willing to pay for it. *** Dut focus on the willingness or ability of the purchaser to pay for a cervice is the concern of the monopolist. . . . In the Michigan situation there are two ways in uhich a small system in Applicant's area could reach the electric and economic pooling benefits obtained by the members of the Michigan Pool: (1) it could become a member of the Michigan Pool, or (2) it could contract with Applicant. If the latter method were used, in such a two party contract Applicant's membership in the broader pool could serve as a conduit to the pool benefits, but only if the contract between Anolicant and the third party permits the benefits to flow through. The evidence shows that Applicant took care not to let k_s
" undesirable" third parties into the pool. After failing to 193
draft an acceptable exclusionary supplement dealing with third
\
parties (D.J. Nos. 170-172), Applicant and Detroit Edison required simply mutual agreement on third party admission. */ When the Department' compelled Detroit Edison to terminate the pro-
- vision (Wolfe, direct, Tr.1684), Applicant and Edison canceled the contract and superseded it with a contract of May, 1973, which permitted small parties to join, but by changing key provisions eliminated much, if not a'll, of the benefits of their joining (Wolfe, direct, Tr. 1684-1692, 1697-1702).
Exclusion was also the rule in biiateral arrangements between Applicant and third parties. For emergency power arrangements, small thir'd parties had to accept.. first a ratchet clause which imposed severe penalties, then the Holland formula, which gave almost no pooling benefit. **/
*/ See our discussion of U.S. v. Termin 1 Railroad Assn. .
TZ2i U.S. 383 (1912), infra at p.203 on the signincance of such arrangement. D.J. No. 69, uritten jointly by Mr. Mosicy and his counterpart, Mr. Reasoner, at Detroit Edison for pres-entation to IEEE carly in 1955, describes concisely the pro-cedures for admitting third parties. All pooling arrangements with other parties ~outside the State of Michigan must be handled as a jo'.nt venture with the two Michigan companies acting as a unit. All arrangements with utilities, municipals, indus-trials having generation, etc. , within the State of Michigan, will be negotiated individually by the company l in whose area such other party is located. However, any such 6apacity to be considered firm in the Consumers-Detroit Edison pool must be approved by the other pool member. , l
** / Under the Folland formula, the City of Hollanicould sell TT/2 mw additional from its installed capacity resources.
- Under the Gainesville formula, 21 additional mw could have
. been sold. (Slcmmer, cross, Tr. 8983-8984) 194 l
l- -
. x . __
Applicant has also demonstrated it was unwilling to enter into contracts for coordinated development with any small system in its area. It was willing only to supply their load growth with firm power based on system-wide costs; the inevitable result was slowly to push them out of the bulk power supply function. When long-run marginal cost of the nuclear power is lower than. average system cost, the difference gives Applicant an advan-tage in competing for prontional loads and gives it the power to price squeeze in retail markets or price others out of the generation business in the wholesale market. (See pp. 163-82 supra.) As a result of both (1) the above-described contractual arrangements between Applicant and Detroit Edison and (2) r Applicant's refusals to enter into contracts of reserve shar-ing in Gainesville terms and coordinated development, Appli-cant. exercised the powers of the classic monopolist. It controls prices of power exchange services in it's area of the lower peninsula of Michigan and excludes competition in the - wholesale firm and retail firm power markets there. We now turn to a discussion of leading Section 2 Sherman Act cases and indicate how Applicant's course of conduct has flouted antitrust principles enuciated in those cases. First, we consider whether Applicant has carried out business practices which raise unnecessary " barriers to '- 195 i .
s
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competition." United States v. Shoe Machinery Corn., 110 F. Supp. 295 (D. Mass.1963, aff'd per curiam, 374 U.S. 521 (1954). Under challenge in the United Shoe case was United's policy of leasing, but not selling, its machines. The court found this to have been a principal factor in enabl-ing United to maintain an illegal monopoly. The leases generally were for a 10-year term; many had a " full capacity" clause requiring that full use be made of the machines (which prevented experimentation with competing machines); many required that when the lessee wanted to replace the machine with one made by a competitor he had to make a i heavy payment to United Shoe Machinery. Judge Wyzanski analyzed the leasing policy as follows: To a large extent, the leasing practices conform to long-standing traditions in the shoe machinery business. Yet, they are not practices Which can be properly described as the inevitable consequences of ability, natural forces, or law. They represent something more. . . . [ United's practices' . . . , instead of encouraging comuetition based on pure merit, they further the dominance of a particular firm. In this sense, they are unnatural barriers; they unnecessarily e::clude actual and potential competition. Uhile the law allows many enterprises O i k 196 s 0 e
~ ~ ~ ~ ~ '
I ( to use such practices, the Sherman Act is now con-strued by superior courts to forbid the continuance of effective market control based in nart upon such practices: Those courts hold thht marhet control is inherently evil and constitutes a violation of 52 unless economically inevitable or specifically authorized and regulated by law. 110 F. Supp, at 344-345. Applicant's refusal to coordinate -- either by outright refusals to deal or by imposing terms so oppressive that they had the effect of discouraging smaller systems from installing large generating units -- with the smaller systems is such a " barrier to competition" to the smaller systems who arc its actual and potential competitors in the firm bulk power market. Just as United Shoe was'willing to lease -- but not sell -- its machinery, the Applicant has been willing to sell these small systems wholesale firm power, but vn-willing to enter into transactions with them for reserve sharing, coordinated development, and transmission services. Those are precisely the factors they need to produce firm < power and compete with the Applicant. It is well established that unilateral refusals to deal motivatc.d by a purpose of maintaining or preserving a monopoly constitute illegal monopolization. Eastman Kodak o v. Southern Photo Materials Co. , 273 U.S. 359 (1927). Co. Kodak originally sold at wholesale to a number of independent ! componics, but then decided to act as its own wholesaler and succeeded in buying out all the wholesalers in the area except the plaintiff. Kodah refused to sell to plaintiff wholesaler
- at the traditional dealer's discount, forcing Southern to pay 197 1
the retail price and making it impossibic for it to compete with the Kodak-owned distribution network. Kodak had a monopoly (75 to 80%) of the national photographic supply market. One of the questions posed to the Supreme Court uns whether the refusal by a monopolist to sell to a competi-tor at a traditional mark-up was purposeful monopolization. The Court held that it was:
. . . Although there was no direct evidence--as there could not vell be--that the defendant's refusal to sell to the plaintiff uns in pursuance of a purpose to monopolize, we think that the circumstances disclosed in the evidence suffi-ciently tended to indicate such purpose, as a matter of just and reasonable inference, to warrant the submission of this cuestion to the jury. ' Clearly', as was said by the Court of Appeals, 'it could not be held as a matter of law that the defendant was actuated by innocent motives of law rather than by an intention and
{_ desire to perpetuate a nonopoly.' 273 U.S. 375. Lorain Journal Co. v. United States, 342 U.S. 143 (1951), is another classic refusal to deal case. There the defendant . enjoyed a monopoly in the mass dissemination of news and advertising in the city until the FCC licensed a radio ' station to serve the city and adjoining areas. To combat the competitive threat the newspaper refused to sell adver-tising space to anyone who advertised on the radio. The Supreme Court recognized that the defendant's monopoly on news and advertising was threatened, that defendant used its monopoly in newspapers to ruin its radio competitor and that if defendant succeeded, its monopoly of the dissemination of news and advertising would again be complete. The Court [ condemned the paper's conduct as an attempt to monopolize. 198
- - . - - - _ . . - . -- , e-
The Court's reasoning was as follows: Assuming the interstate character of the commerce involved, it seems clear that if all the ncuspapers in a city, in order to monopolize the dissemination of news and advertising by eliminating a competing radio station, conspired to accept no advertisements from anyone who advertised over the station, they would violate
$51 and 2 of the Sherman Act. . . . It is con-sistent with t'it result to hold here that a single ^newsnar r, alrecuv enjovina a substantial monopolv in fcs crea, violates tne 'attemot to mononolice' cicuse of 62 unen it uses its reononoly
~
to destrov threatened comnetition. 342 U.S. at 143. (Emphasis adoed.) The Court then rejected the newspaper's argument that it had a complete right to refuse to acccpt advertising whenever it wanted: The right [to refuse to sell) claimed by the publisner is neither cbsolute nor enemnt
'x
('" from regulation. 1ts 3 cxercise as a rurnoneful mecns or monocolitine interstate commerce is prohibitec ov ene bnorman Act. The operator or the racio station equally with the publisher of the ncuspaper, is entitled to the protection of the Act. 342 U.S. at 187. (Emphasis added.) Applicant's denial of access to coordination to other systems is such a unilateral refusal to deal for the purpose of maintaining its wholesale monopoly. Applicant's purpose is plain from its history of acquisitions and attempted acquisitions of small systems--marked by its representations that only through acquisition would the customers of those systems be able to obtain the benefits of power from a coordinated system. Even in unveiling its new< policy, one apparently intended to comply with Otter Teil, Applicant's Chief Executive Aymond restricted its offer of wheeling services to situations where it "will not result in a 199
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l significant loss to Consumers Power," (Aymond direct, Tr.
'6050; cross, Tr. 6099, 6100). Nor wod1d Applicant agree to wheel if so doing would result in cocpatition in its purchases of power, for example, from Ontario Hydro. (Aymond, cross, Tr. 6095). */ Thus, even the "new" Applicant would employ its monopoly of transmission facilities to maintain its wholesale monopoly and would refuse to wheel where it would-lessen Applicant's dominance.
*/ See also the deposition testimony of Mr. Aymond:
Q. Assume that Ohio power or Bukeye power or Ontario Hydro or some other entity were will-ing to sell power to a municipality within your service territory, would you sell transmission services to get the power there? ( A. The matter has never come up and I think I would want to know more of the details of the trancaction. I would want to know, for one thing, whether or not our lawyers felt we were obligated to do so. For another, I would want ~to know for what purpose the power was being sold and at what rate . . . . what the receiving utility intended to do with it, what impact it would have in the long run on the ability of Consumers. Power Company to maintain its present markets. Q. Is it fair to say that your judgment would be based at least in part on your judgment of the extent to which the purchase of this power by the municipality or cooperative within your service territory enabled it to reduce its rates in competition with Consumers Power? A. I think that would be a factor.' Q. A large factor? A. ( I think so. Q. Apart from the question of your legal
-obligation, are there any other major factors?
Ootnote' continued on next page)
There are several cases in which a charge of illegal monopolization was predicated upon a showing that the defend-ant used the leverage afforded by the natural monopoly it enjoyed in one market to monopolize or attempt to monopolize a second market. One such case is Packaned Programs, Inc.
- v. Westinghouce Broadcasting, 255 F.2d 708 (3d Cir.1958).
The key facts are as follows: Westinghouse owned the only TV station in Pittsburgh, giving the company a legal monopoly in television broadcasting in parts of Pennsylvania, West
. Virginia and Ohio. The company also operated a related business involving the p'roduction of commercials for TV advertisers, the same business in which the plaintiff was I engaged. The case arose because Westinghouse refused to schedule commercials produced by the plaintiff. Plaintiff argued that Westinghouse used its lawful monopoly as the owner of the sole TV station in Pittsburgh to monopolice the market for production of TV commercials. The court held that a lawful monopoly in one area did not protect a monopolist who used that monopoly position as a lever to achieve a monopoly at another level of business operations.
* / (footnote continued from preceding page)
A. .
. . . I think whether the receiving utility actually was going to use it to invade our present market area would be a factor.
Q. What do you mean by " invade our present market area"? 4~x. A. Well, start taking away our customers which we have invested a great deal of money in order to serve them (Inc. no.1004, pp.183-184) . 201
A similar case is 'Six Twentv-Nine Productions v. Rollins Telecastinn, Inc. , 365 F.2d 478 (5th Cir. 1966), Plaintiff was an advertising agency which, inter alia, pre-pared commercials for television broadcasting. Defendant, the only television station in the area, had its co=mercials prepared both by the station personnel and by the three advertising agencies in the area, one of whom was the plain-tiff. .The problem arose when a client, whose advertising had previously been handled by the station, hired plaintiff to prepare a commercial. The station advised plaintiff agency that it would pay no co==ission to the agency and that it would "recognice" (as qualified to receive a 157.
~ commission from the station) only one agency henceforth.
The court placed heavy reliance en Westinghouse: The theory of both cases is that the tele-vicien stations uned their local conocoiv oover to creai:e reno,olv nower rn a sc,arate our reinted rieid in unicn a monouoliscic renulated incustrv is not tne national oolicy. Soo F.2d at 483. 7 The court concluded that
. . . the complaint is sufficient if the refusal of defendant to accept advertising from plaintiff by setting up reasonable standards or by adopting an arbitrary course of action is for the purpose of destroying plaintiff as an agency and thereby furthering a cou,rse toward monopolication. Id. ,
The Westinchouse and Si:: Twentv-Nine Production cases bear considerable shrilarity to the present case. Applicant uses its control over transmission to prevent competition in (s_- the firm bulk pouer carket. It refuses to enter into coordi-nating trancactions with the smaller systems. Just as the 202
advertising agencies in the Westinehouse and Six Tuenty-Nine Production cases could not function in the advertising business unless the television stations permitted them to do so, here the small systems cannot compete effectively without access to coordination. Another line of pertinent cases involve what has been denominated as the " bottleneck theory," which has been described as follows: The Sherman Act requires that Where facilities cannot practically be duplicated by would-be competitors, those in possession of them must allow them to be shared on fair terms. It is illegal restraint of trade to foreclose the scarce facility. */ The theory had its genesis in United States v. Terminal Rail-( road Association, 224 U.S. 383 (1912). A group of railroads \. established a jointly-ouned company Which controlled the principal terminal facilities in St. Louis, Mo. , and East St. Louis, Ill. This was a key cast-west traffic location because eastern railroads terminated on the eastern side of the Mississippi River and western railroads had their terminus on the western side. The terminal company owned the lines connecting the two terminal areas on each side with the only tuo bridges and ferry available for crossing. The agreement underlying the joint terminal company provided that non-member railroads could be admitted to ownership upon unanimous approval of the mcmbers. Thus, the sponsors
*/ A.D. Neale, The Antitrust Laws of the U.S.A._, Cambridge Univ. Press. (1960), p. 07. See also pp. 12'/-133.
203
of the tenninal company could discriminate against outsiders s in charges and could veto the use cf facilities by outsiders. The Supreme Court found that outsiders as a practical matter could not' build their own facilities due to topologi-cal and geographic imperatives. The Court concluded that
. . . When the inherent conditions are such as to prohibit any other reasonable means of entering the city, the combination of every such facility under the exclusive ownership and control of less than all of the companies under compulsion to use them violate both the first and second sections i
of the act. . . . 224 U.S. at 515. This is remarkably sbnilar to the present case. Appli-cant controls the transmission, and with it, access to the regional power exchange market. [ The bottleneck theory was reaffirmed in Associated Press
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- v. United States, 326 U.S. 1 (1945), and Silver v. New York Stock Exchance, 373 U.S. 341 (1963) .
The Supreme Court made clear in Associated Press that the competitive advantage need not oc indispensably neces-l sary to competitive survival, but it is sufficient that i without it the excluded competitor is at a significant competitive disadvantage. */ This was stressed by Judge Learned Hand for the three-judge District Court in Associatqd Press, in a passage quoted with approval by the Supreme Court:
'- / See also Gamco. Inc. v. Providence Fruit & Produce
~
! B 1dit . , Inc . , 194~P. 2d 404, 487-488 (1st Cir. 1952), 1, cert. denied 344 U.S. 817 . m 204 ,
i Most monopolies, like most patents, give control over only some of the means of production for Which there is a substitute; the possessor enjoys an advantage over his competitors, but he can seldom shut them out altogether; his monopol" is measured by the handicap he can impose. ... And yet that advantage alone may make a monopoly unlawful. 326 U.S. at 17 n. 17. A final case in point is Otter Tail Pouer Co. v. United States, 410 U.S. 366 (1973). Otter Tail involved the appli-cation of Section 2 to an integrated cicetric power company Which generates, transmits and distributes electric power in adjacent parts of Minnesota, North Dakota and South Dahota. Otter Tail has the only transmission system in this area. It distributes electricity in some 465 towns in its service area and sells power Wholesale to 17;other municipalities ( Which engage in distribution. When additional towns desired to set up their own distribution systems, the company engaged in a variety of different actions to forestall them: these included refusals-to sell power at wholesale and refusals to wheel power across.its system from other sup-pliers. Sinceinmostinstancesthebewasnootherwayfor such a totm to obtain power, it was left with two choices: either to abandon its plans or set up a high-cost, isolated generation system. The district court found that Otter Tail's activitics constituted illegal monopolication under Section 2 of the Sherman Act. It enjoined Otter Tail from refusing to sell or wheel power for municipal' systems in its own area. The Supreme Court affirmed this portion of the district court decision. j 205
' Like Otter Tail, Applicant dominates transmission in its area. (D.J. No.1) Like Otter Tail, Applicant has uset.
that dominance to suppress competition, and whereas-Otter Tail prevented the formation of mun.icipal distribution systems. Applicant prevents tbc development of competing bulk power suppliers. O g
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l l s e 4 8 g 206 ,
, - - . . , - - , - . - ,- ., . -, -- e-, - , . -, - , ,
- c. The Actual and Potential Competition in Michigen's-Lower Peninsula on which the Department has Focused is Exactly the Kind of Competition Intended to be
- Protected by Section 10Se Four reasons compel the conclusion that competition of the nature and extent now extant in Michigen's lower peninsula is the type of competition which is subject to the protection of the antitrust laws and hence of Section 105c.
First, a recent case involving the electric pouer industry, Otter Tail Power Co. v. U.S . , 410 U.S. 366 (1973) resulted in a grant of antitrust relief for the protection of one of the very types of competition involved in this proceeding. Second, in Phillips Petroleum, infra, the Supreme Court, by its per curir.m affirmance of the district court, reaffirmed its dedi-cation to the protection of " potential competition", a form t of competition prevalent in the electric power industry in Michigan's lover peninsula. Third, as we will show, the legislative history of the 1954 Act reveals that competition of this sort was the principal, if not the only kind of compe-tition to which the protections of Section 105c can be attributed. Fourth, the icgislative history of the 19.70 amendment further evidences the same purpose.
- 1. In United States v. Otter Tail, t enra, the evidence presented by the government showed that Otter Tvil, by refusals to sell power at wholesale, by refusals to wheel bulk power supply from the U.S. Eureau of Reclamation over its subtrans-mission system to the Village of Elbow Lake, and by harassing litigation on the eve of bond sales, was successful in raising 207
i, barriors to the entry of municipal electric power systems (- . which could haver ' c~placed Otter Tail's distribution system in various parts of Otter Tail's service area. Although Dr. Pace and Mr. Paul in their testimony attempted to discount the significance of this sort of competition in Michigan s. lower peninsula, we have shown above that, in fact , in the day-to-day operations of Consumers Power Co. such competition was a source of genuine concern to the company's chief executive Aymond. ,' Following Otter Tail, there can be doubt whatsoever that the fundamental national policy of competition applies to the wholesale and retail distribution of electric power and must , be harmonized with the federal and state regulatory schemes. ,- The contention raised by Otter Tail Power Company in the N antitrust court case and by the Applicant here -- that compe-tition has been ousted by a comprehensive scheme of regulation and that competition in the form of-potential entry by municipalities into the electric poner business is not entitled to' the protection of the antitrust laws -- has clearly been rej ected. The following excerpt from the Supreme Court's decision f in Otter Tail makes cicar that the actual and potential compe-tition of municipal electric systems was the precise competi-tion that Otter Tail Power Company had throttled: ) The' record makes abundantly clear tha't Otter Tail used its monopoly poner in the cities in its service area to foreclose competition or gain a competitive advantage, or to destroy a competitor, all in violation of the antitrust laws. See United (C 208 1
- _ , , , , _ . _ . _ . , _ . . , , _ . . . - , , . _ _ . , ._ , ,. . . - . . , _ , , . , , . _ ,._,,.-...y.. . , , . _ .._.4.
i States v. Griffith, 334 U.S. 100, 107. The Dis trict l Court determined that Otter Tail has 'a strategic i , dominance in the transmission of power in most of its service arca' and that it used this dominance to foreclose potential entrants from outside sources of supply. Use of mono threatened comnetition' poly is a power 'to destroy violation'of the
'attemut to monocolize' clause of 92 of the Sherman Act, i.ornin Jcb nal v. United States, 342 U.S. 143, 154; Eastman Kodam Co. v. Soutnern rnoto liaterials Co., T/3 U.S. 33 9, 375. So are agreements not to compete with the aim of preserving or extending a monopoly.
Uhen a community, serviced by Otter Tail, decides not to renew its retail franchise when it expires, it may generate, transmit, and distribute its own electric power. We recently descrioed the difficulties and problems of those isolated electric power systems. See Gainesville Utilities v. Florida Power Ceoneration, 402 U.S. 515, 517-Z0. Interconnec-tion with otner utilities is frequently the only solution Id. at 519, n. 3. That is ubat Elbow Lake in the Wesent case did. There were no engineering factors that prevented Otter Tail from selling pouer at whole-sale to those towns that wanted municipal plants nor of tfaeeling the power. The District Court found--and its findings are supported--that Otter Tail's refusals to sell at tinolesale or to sfacel were solely to prevent municipal power systems frem eroding its monopolistic position.
- 2. United States v. Phillius Petrolcum Comoany, 367 F.
2cI Supp.1226 (C.D. Cal.1973): aff'd 42 U.S.L.U. 3710 (July 8,1974) is the most recent in a long line of Supreme Court cases pl' acing potential competition under the protection of the antitrust laus. - Applicant's economist Dr. Pace testified that competition between Applicant and others in Michigan's lower peninsula could be classified into three kinds: (a) Competition on the termination of fixed period franchises, which, as discussed immediately above, is the type of competition protected by 209
Otter Tail; (b) actual competition in Bay City and Traverse ; C City, and other actual competition for individual customers located largely on the fringes of cities, and competition between distribution cooperatives and Applicant for large "3 phase" loads; * / and (c) ccmpetition by municipal entry in Foote Act areas where house-to-house and street-to-street competition would be costly to both competitors and would continue until one decided that the competition was too costly and decided to sell its facilities to the other. Phillins Petroleum analyzes, from an economic and legal standpoint, the effect of potential competition of the sort that can be expected to occur in such areac: The beneficial effects upon competition exerted by a potential ccccctitor outcide the
~
market may be of two hinds. These vill be denoted C ~~ the ' entry effect' and the ' edge effect.' The entry effect arises frca the likelihood of actual market entry by the potential competitor at some time in the future. The edge effect, sometimes termed the ' waiting-in-the-wings' or the 'on-the-fringe' effect, is the beneficial effect upon competition exerted when a company is poised on the edge of the market, threatening to enter if market conditions become sufficiently favorable. The importance of the edge effect derives from the realization that the competitive behavior of
*/ Although Dr. Pace used Mr Paul's studies in an attempt to minimize the extent of actual competition, Mr. Aymond complained about how this competition " eroded our markets."
(Aymond, cross, Tr. 6069) ( 210
companies is not determined solely by the actions , and intentions of those in the market, but also outside the market uho may come in. The presence of a potential entrant on the edge of the market e::erts a moderating influence on those inside. If the firms inside raise prices beyond a certain level, for instance, a company on the cdge may decide to enter because the profitability of entering would be enhanced by the higher prices. Its entry, in turn, would make conditions in the market more com-petitive. 357 F.Supp. at 1232, 33. The court listed a number of cases in which the Supreme Court's decision in cases arising under Section 7 of the Clayton Act had recognized the importance of the edge effect, including: U.S . v. Penn-Olin Chemical Co . , 378 U.S. 158, 174 (1964); F.T.C. v. Proctor & Gamble Co.,386 U.S. 568, 581 (1967) . In _U.S . v . Felsta ff Brewine Corp., 410 U.S. 526,(1973), as noted by Judge Ferguson in Phillins Petroleum, the Court held that f ( potential competition from the edge effect should be protected even if it uere cssumed that the potential competitor vould not actually have entered the market. Thus, the decision went beyond Penn-Olin, and Proctor & Gamble in recognizing the competitive significance of a company which might merely e::ercise a procompetitive effect on the edge of the market, regardless of whether it is likely to enter the market uni-laterally at some. future date. In P_h'Eins Petroletrn, company management denied that it would never be a competitor of Tidewater Oil, but the court found from objective evidence,over the denials,of company management, that they were potential competitors. In contrast, in this proceeding, Mr. Aymond, Applicant 's 211
chief executive acknowledged that he was concerned with potential competition from municpal entrants: Q. Are you concerned with this possibility? A. Yes, sir. Q. That -this could happen, meaning that your company will be forced to sell their facilities to them from the competitive pressures? A. Well, there is a lag, of course. I mean, after all, between the time that a community organ-izes a municipal system and the time it gets started in the business and starts taking away customers, until the point when we see that we are going to have to sell out to them, that could take a period of a few years. . . . But it is definitely a possibility, and it could happen in certainly all of the larger communitics and the cities that we serve.
- f. (Aymond, cross Tr. 6466-68)
- 3. In June, 1953 the Joint Comaittee on Atomic Energy, after two months of closed executive co=mittee hearings, commenced its Hearings on Atomic Power Development and Private Enter-prise to determine the desirability of legislation to amend '
! or supersede the 1946 Act, which had left development of the atom principally in the hands of the Federal government. It was the promise of nuclear electric power uhich led to the , Committee's action. */ l
*/ 83rd Cong. 1st Sess, on Atomic Power Development and Private Enterprise June, 1953. These were followed by hearings in May, 1954: 83rd Cong. 2nd Sess. Hearings before the Joint
! Co=mittee on Atomic Energy on S. 3323 and H.R. 8862 to amend l the Atomic Energy Act of 1946. ("1954 Hearings") 212 4 ,
e f In both the 1953 and 1954 hearings, Mr. Leland Olds, former chairman of the Federal Pouer Commission, who had had regulatory experience in state public utility regulation extending back to 1929, was invited to testify. In response, Mr. Olds submitted testimony on the probable effect of the legislation on federal electric power policy. Olds' views centered on two major points. Fist, he noted the importance of competition from public and coopera-tive electric power systems as a supplement to regulation of the large investor-owned utility companics. Secondly, he explained that because of changes in t echnology small munici-pal systems could no longer compete with the interconnected and integrated very large private systems unless they were able to obtain an equally low cost. power supply. */ This had been partially accomplished by the federal unter power policy uhich gave preference to non-profit systems in the sale of federal water power from Federal hydroelectric facilities and in the licensing of hydroelectric projects on navigabic streams under the licensing scheme in the.1920 Water Power Act, 16 U.S.C. 791 a., 41 Stat. 1077 and 49 Stat.
~
l 847. Viewing the loss of competition from public power sources as undesirable, Mr. Olds nonetheh$ss predicted that such competition would disappear unicss something were done to assure tiu small public systems a competitive bulk power i.
*/ 1954 Hearings, at p. 553. ,
! 213 o ,
~' . . . . . . . . ,
( supply, as the water power available under the preference
~
clause was limited in supply. Except for some expressions of concern about the possi-bility of monopoly through patent abuses on the part of the industry which uould supply the necessary hardware to the nuclear power industry, discussion of competitive problems during consideration of the 1954 act centered on the area to which Mr. Olds had directed attention. However, there was considerable disagreement in Congress as to the manner in which the competitive relationships between public and private power entities should be r.ddressed. Some favored AEC opera-tion of nuclear power plants with a clause similar to tha~ which Congress had enacted in uaterpower legislation tinich ( would give preference to the output of such plants to the small systems. Others believed that nuclear power should be developed outside the AEC with prelicensing antitrust review by the AEC in order to deal with competitive problems where necessary. After lengthy debate, including a thirteen day filibuster, Congress opted for ownership of nuclear power plants outside the AEC and for antitrust review as part of the licensing process. Uhatever- the differences on the part of the icgislators may have been, the legislative history is clear that the competitive relationships between the large utility companies and the existing and potentini municipal and cooperative systems were the genesis of the antitrust review provisions of the Atomic Energy Act of 1954. 214
= e g
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I i
- 4. The legislative history of the ~ 1970 amendments to the Atomic Energy Act reinforces the conclusion that actual and potential competition from public power is intended to be protected by Section 105 .
In Cities of Statesville v. AEC, 441 F. 2d 963 (D.C. D.C. 1969), the court had warned that prelicensing antitrust review could be required at the operating license stage for reactors which were in fact commercial, even though rejecting it as a requirement for a construction permit applying for a medical therapy or experimental reactor: At that point the Commission must determine whether e the performancepracticability demonstrated of. other larg(en-scale d thusplante have cc=m2rciality) sufficicntly_ to warrant an authorication under section 103. We warn the Commission that it has a most (, serious duty to perform at that stage, for if the ' trade has shewn that these nuclear reactors are ccm-petitive in the commercial sense and it is clear that a ccamercial license is appropriate, then the Commission must consider under Section 105 c, antici-patory antitrust impact. Following Statesville, suora, legislation was deemed desircble so that antitrust questions could be cleared up at the construction stage, since delay at the operating stage would leave important questions over ownership of power supply unanswered until shortly before the units were to come on line and would be needed to meet power loads. The principle proponents of retaining the prelicensing antitrust review fcatures were representatives of municipal and cooperative pcwer systems. Senator Aiken, a member of the Joint Committee, who was closely associated with the revision of Section 105c, . through his f I s. 215
sponsorship with Senator Kennedy of the Aiken-Kennedy bill, * /
/
which with its hearings is part of the legislative history of the 1970 revision to the Atomic Energy Act, stated his view of Section 105 to the Senate in an address later re-printed in Part 2 of the hearings on the 1970 revision. ** / For more than two years the utility corpora-tions have been steadfastly opposing legislation to provide reasonable regulatory controls under the Atomic Energy Act. The legislation which they oppose would pro-tect the environment and set up antitrust safe-guards that would allow the small investor-owned utilities, municipal electric companies and rural electric cooperatives to share in the benefits of nuclear power. The ultimate goal of the utilities is apparently to concentrate all electric generation in the hands of 12 to 15 corporations uhich would have complete understanding among themselves. . This scheme is part of a grand strategy under-lying what is called " economy of scale", a slogan which is intended to justify monopoly. Once competition by small utilities and public bodies has been eliminated, the few remaining giant utilities will be free to make rates and reduce service almost at will, and the consumers will be the ultimate losers.
*/ 90th Cong. 2nd Sess. S. 2564. 90th Cong., 2nd Sess.
11 earings before the Joint Committee on Atomic Energy on Particination of Small Elcetrical Utilities in Nuclear Power (1968). .
**/ 91st Cong. 2nd Sess. Hearings before the Joint Com-mittee on Atomic Energy on Prelicensing Antitrust Review of Nuclear Power Plants, part 2, pp. 553, 4.
216 _ _ _ _ 1
Equally important-- and this should be empha-sized--is the. fact that more than $2.3 billion of Federal money was invested in the advance research that made atomic power reactors profitabic. This investment of public money was made by Congress in hopes of developing cocmercially feasible, competitive atomic power. Therefore, the municipals, rural cooperatives, and small investor-owned utilities have~an inalien-able right to share in the benefits of nuclear power. Thus, over and over again the legislative history shous that concern about elimination of the very type of competition in Michigan's lower peninsula which is the focus of this pro-ceeding, was precisely the area of monopoly concern expressed by the Congress when it enacted and subsequently amended Section 105c. ,, ( 4 4
*T-(
(
't 217
- 7. The Licensed Activities Will Maintain the Situation Inconsistent with the Antitrust Laws
- a. The Licensed Activities.
The " activities under the license" include the integration of 1300 megawatts of nuclear power into Applicant's system for marketing in the area of lower Michigan where Applicant is located. (Stafford, direct, Tr. 9166) That 1300 megawatts of nuclear. power--supported by the tying of Applicant's system into the regional power exchange--is expected to be the cheapest available power to serve new and growing loads at the time the Midland units go on line. (Stafford, direct Tr. 9160, 9166; cross Tr. 9240; Aymon4 cross Tr. 6353) 7 The 1300 megawatts of large unit, base-load, nuclear electric power produced by the Midland units will represent approximately 16% of Applicant's t-otal generation capacity at the time of installation (D.J. No. 183T and will represent un even greater percentage .of Applicant's base load capacity (generating units projected to operate nearly full timeT. Moreover, the Midland units are not Applicant's first nuclear generation facility. When operational, the Midland units will increase the nuclear portion of Applicant's generation capacity to approxim.ately 36% (D.J. No. 183, p. 41 N,or will the Midland units be Applicant's last nuclear installation. While Applicant has temporarily deferred two ll50-megawatt units originally expected to be in operation in 1982 and 1983 (the ( Ouanicassee units) because of difficulties in financing, Applicant apparently believes nuclear generation to be the 218 s
~
-_a
/
( most economical form of new base-load electric power generation for use in Michigan's lower peninsula. (D.J. No. 21, pp. 15-
- 17. Aymond, crosq Tr. 6353; Stafford, crosq Tr. 9240.)
This belief is entirely reasonable.(Brush, redirect, Tr. 2502) In addition to the cost advantage of nuclear generation vis-a-vis alternative types of generation, there is a serious cuestion as to the availability of fuel for alter-native types of generating units.(Steinbrecher, direct, Tr. 1225-27; Mayben, direct, Tr. 2807) The national reserves of natural gas have not expanded commensurate with the increased usage and production. The reserves-to-production ratic has decreased from 20.1 years in 1960 to 12.6 years in 1970. Despite the Federal Power Com-mission's recent efforts to provide added economic incentive for gas exploration, natural gas is presently not a viable alternative fuel for electric power generation. i. While coal per se is in abundant supply, with a 1970 reserves-to-production ratio of over 1,000 years, the availability of low-sulfur-content coal for use in Michigan's lower peninsula is not certain. Essentially all of the low-l l sulfur subbituminous coal and lignite, and one-hs1f of the l bituminous coal of less than 1.57. sulfur content, is located west of the Mississippi River. Three-quarters of the low-sulfur bituminous coal located in the East is metallurgical-grade coking coal which is either dedicated to the metallurgi-l' cel and export markets or is owned directly by steel companics. i 219 l . , _ _ _ _ . _ . -- .. . _- =
e . With the impact of environmental considerations and new Federal, state and local emission standards, the avail-ability of coal faces further uncertainty. (D.J. No. 236. Steinbrecher, cross, Tr. 1484-85; Brush, redirect, Tr. 2497, 2500-01). And finally, the availability of oil is obviously doubt-ful. On October 12, 1973, the Directer of the Energy Policy Office issued emergency regulations for the mandatory alloca' tion of middle-distillate fuels .(kerosene, jet fuel, diesel, heating oil, etc.),38 F.R. 199, p. 28,660. , Allocations will [ be made on the basic of purchases- during the base period-- the like nonth of 1972--and will be available on a similar basis to all wholesale purchasers (including electric utilities). The likelihood of sufficient oil for oil-fired generation is slim (Steinbrecher, direct, Tr. 1225-27; i Mayben, direct, Tr. 2807; Brush, redirect, Tr. 2503-04), leaving the small systems in Applicant's area the sole ~ option, absent access to the Midland facilities, of in-stalling coal-fired generation to meet the,ir load growth 4 e 220
-~
recuirements. As Mr. Helfman's exhibits make clear, the unavailability of combined-cycle generation makes access to nuclear power and full coordination even more vital to these small systems in achieving a competitive power cost. (Compare Schedule I of D.J. 200, showing a net savings from coordination to the small systems (having oil available) of $87 million, with D.J. 202 p. 2, showing a net savings of $179 million if coal rather than combined-cycle gen-eration is the only alternative.) Apart from present questions as to the availability of fuel for alternative types of generation, nuclear 'l power clearly appears to be the most econcmical form of large-unit base-load generation. Morcover, given the probability of continued increases in the price of fossil fuels, "there does not appear to be any reason to expect that the nuclear advantage will not be maintained or even increased as time goes on." (National Power Surv.ey, 1970, Part II-1-59). Applicant's.S.upplemental Environ-mental Report (AEC Docket Nos. 50-329A, 50-330A) */
*/ D.J. No. 236.
4 i m 221 e- -P"< e e T._
presents an economic comparison of possible generation alterna-tives for supplying the 1300 megawatts of power generation to be provided by Midland Plant. The following tabulation from the Report shows the total cost of the alternate power sources per kilowatt-hour: Overhead & Assumes 1300 mw capacity Capital Fuel _*/ Maintenance Total Midland Plant 6.18 1.99 0.50 8.67 Coal Steam Plant 8.76 5.70 0.80 15.26 011 Steam Plant 20.10 6.86 0.80 27.76 Oil Combined Cycle 10.92 6.86 1.00 18.78 Oil Combustion Turbines 40.77 16.86 1.20 58.83 While the Department does not necessarily concur in Appli-cant's figures, we certainly concur in the proposition that ('~ nuclear power is likely to provide the lowest-cost.large-unit, base-load generation for Michigan's lower peninsula. Appli-cant's Mr. Stafford testified:
- 0. What is the figure for Midland nuclear per kilowatt-hour?
A. For Midland-l in 1980 it would be 4.73 , mills per kilowatt. Q. And what is the cost per kilowatt hour of the best fossil fuel during that year? A. In 1980 for the Campbell 1 and 2 Units at a heatrate of about 9000 Btu per kilowatt hour, we l arrive at an 8 mill cost. . Q. And how does that compare with the Midland cost for the same year? i (
*/ This is based on a nine-year levelized fuel cost.
l 222 l o
s A. It's greater than Midland. Q. Then, having the opportunity to take power from Midland is a substantial advantage to Consumers Power Company, is it not? A. Yes. (Stafford, cross, Tr. 9240). Applicant's 1972 Annual Report echoes the importance of nuclear power:
~
In the next 27 years, between now and the year 2000, our major energy problem will be to develop increased domestic sources of oil, gas and coal, and to make greater use of available uranium to generate electricity. There will be greater reliance on coal and much greater need to utilize nuclear fuel. In Michigan, it is clear that nuclear genera-tion of power must increase dramatically, and
,, cuickly, if foreseeable recuirements for electric
( energy are to be met. Indeed, if the state is to continue to compete for jobs with all the other industrial states, Michigcn's people--and most especially organized labor--must realize that nuclear power is their hope. Nuclear power, then, continues to hold out , the greatest and best promise for meeting the energy needs of the future. (D.J. No. 21,
- pp. 16-17) l The advantage of integrating low-cost nuclear generation l into a multiple-plant, multiple-fue1, electric utility opera-tion is obvious. Average cost is reduced. (D.J. No. 232.
i Aymond, cross 6361-63) To the extent that Applicant is able to reduce its average cost while preventing its competitors from Coing so, it improves its competitive position. (Wein,
- 7 p.d. 65; Rogers, direct,Tr. 5544T l \--
r L 223 s
U l l
-1 The 1300 megawatts of electric power from the Midland units will be marketed to meet Applicant's load-growth requirements (Stafford, direct Tr. 9159-60T By combining the unit, through high-voltage transmission lines, with other generating units owned by Applicant and others, Midland power can be marketed as " firm" power. As previously stated, the principal demand for electric power is for firm power. If operated physically and contractually isolated from the remainder of Applicant's system or from other systems or units, at most. only 50% of the combined power available from both units could be marketed as firm powen (Mayben, direct, Tr. 25531 Ultimately,the economic feasibility of.each
( Midland unit depends ~en the connection of the unit through a high-voltage transmission network to other generating units for reserves, and to other load areas for purposes 'of load-growth pooling,(Mosley, cross Tr. 8616-19; Wein, p.d. 64T Without these interconnections, Applicant would not constru t these nuclear units because it could not market the power as firm power. The press release announcing the construction of Midland
. highligFts the importance of interconnections to Applicant's evaluation of the economic viability of the project:
Power from the Midland and Luddington plants, as from all Consumers Power generating facilities, will be fed into the Michigan power pool, of which Consumers Power Company and the Detroit Edison Company are principal members. The Michigan pool presently is interecnnected with Canada and by 1969 the pool will be interconnected also with utilities in Ohio and Indiana. 224 s
Location of the new plant near Midland was based on forecasts of system-wide demands for electric energy by Consumers Power's customers in the mid-1970's and by prospective development of the Michigan power pool's transmission system . . . . (D.J. No. 183, p. 41
- b. The Nexus: The Licensed Activities Would Maintain the Situation The Commission has emphasized that there must be a .
meaningful nexus between the activities under the nuclear license and the situation alleged to be inconsistent with the antitrust laws in order for those activities to be found to create or maintain that situation. */ The Department agrees antirely. The statutory finding recuired of' the Board is concerned wir.h the relationship or nexus between two things:
-(1) " a situation inconsistent with the antitrust laws"; and (2) " activities under the license." The requisite nexus is simply that the activities must " create or maintain" the ,
situation. The evidence adduced in this proceeding has made the existence of this nexus quite clear. We have shown first, as discussed above, a situation. inconsistent with the antitrust laws wherein Applicant has
- monopolized the firm bulk-power market over a large area of Michigan's lower peninsula through its refusal to grant other
( */ Memorandum and Order in the matter of Louisiana Power and Light Company (Waterford Steam Electric Generating Station, Unit 3), Docket No. 50-382A, September 28, 1973. 225
electric systems coordinating access to its system and to the regional power exchange market. Second, it is undisputed that the activities under the licenses include the construction of the Midland units and, eventually, the operation and marketing of the 1300 mega-watts of power they will produce. This power will not and cannot be marketed in isolation--the Midland units will be integrated into Applicant's system and coordinated with generation of other systems through the regional power exchange market. Finally, we have demonstrated that Midland power will
, strengthen and expand Applicant's system and the regional power exchange of which it is a part. This strengthening and expansion will increase Applicant's future ability to install and obtain low-cost power from large units (Aymond ,
cross, Tr. 6441). Yet, concurrent with Applicant's action
'9 of installing and planning to operate the Midland units to strengthen and expand its system and the regional exchange, the Applicant continues to refuse reasonable access to the l
l regional power exchange market by its competitors. It thus I - ! forecloses them from applying for licenses to ins tall their own large, low-cost base-load nuclear generation--and from obtaining the benefits of the nuclear technology developed by the Federal Government. As a further consecuence, it denies them the low-cost power they will need to compete with Appli-cant's Midland power for new and growth loads and to support
~
their future competitive installation of large generating units. 226
Construction and operation of the Midland units and marketing of the power from those units through integration into Appli-cant's system and the regional power exchange thus demonstrably furthers Applicant's monopolication of the firm bulk power market. Construction and operation of those units will thereby maintain and indeed exacerbate a situation inconsistent with the antitrust laws. ' This is the nexus required by the plain language of Section 105c(5T. */ It is not necessary that the license acuivities themselves be inconsistent with the antitrust laus or their policies. It is not necessary that the licerne activities create a situation inconsistent with the antitrust laws where none was present before. It is not necessary that the effect of the license activities on the existing situation be an effect peculiar to nuclear power, or an effect which only the advent of nucicar power could bring about. It is not necessary that the license activities be the sole cause of maintaining a situation inconsistent with the antitrust laws. The only thing necessary is that the license activities le found to contribute in a significant manner to the maintenance of a situation inconsistent with the antitrust laws or their underlying p'olicies. *
*/ This is confirmed by the legislative history of the
( IV70 Amendment to the Atomic Energy Act, which the Department ( previously re'-iewed in some detail in this proceeding. Reply on Issues Other Than Disoualification, June 9,1972, and which is incorporated herein by reference. 227
B. APPLICANT'S ASSERTED DEFENSES HAVE NO MERIT
- 1. There are No Immunities from AEC Antitrust Jurisdiction or Conflicts with Other Federal or State Jurisdiction,
- a. No Other Federal Lau Prevents the Atomic Energy Commission from Imoosing the Requested Conditions.
While there is a long line of cases dealing uith the effect of Federal regulatory jurisdiction over an industry or on the application of the antitrust laws to that industry, these cases are pertinent only where Congress has been silent as to whether it has intended the structure and performance of an industry to be governed by regulation rather than the funda-f- mental national policy of competition. United States _ v. I Philadelphia National Bank, 374 U.S. 321, 372 (19631; Silver
- v. New York Stock Exchance, 373 U.S. 341, 357 (1963T; Northern Natural Gas Co. v. F. P. C., 399 F.2d 953, 959 (D.C. Cir. -
1968). t Congress, in enacting the Atomic Energy Act, was not silent. Rather, it expressly reaffirmed the fundamental l economic policy favoring competition (Sec. 1 of the Act, 42 l U.S.C. 52011), specifically preserved the right to apply to the courts for relief from violations of the antitrust laws notwithstanding AEC assertion of jurisdiction (Sec. 105a, l 42 U.S.C. S2135(a)), and recuired the AEC co utilize its i licensing jurisdiction to further the policies underlying the antitrust laws (Sec. 105c, 42.U.S.C. 52135(cTT. Thus, the l ouestion of whether or not the antitrust laws apply to nuclear power plant licenses is clearly answered in the affirmative. 228
Even if the cuestion of Congress' intent had not been disposed of by its enactment of Sections 105a. and 105c. , the proposition that the Federal Power Commission has such compre-hensive jurisdiction over electric power matters as to exclude antitrust enforcement by the courts (and, by extension, the AEC) could not be supported. Such a contention was recently rejected by the Supreme Court in Otter Tail Power Co. v. United States, 410 U.S. 366 (1973). Although proposals for immunizing the electric power industry from the antitrust laws have been made from time to time, * / Congress has consistently declined to enact such proposals. Indeed, the .very section of the Atomic Energy Act i under which the instant proceeding was instituted represented a reaffirmation in 1970 by Congress of its dedication to com-petition as an important economic regulator of the electric utility industry. The 1970 enactment removed the loopholes which had previously precluded the Atomic Energy Commission - from carrying out Section 105c. prelicensing antitrust review and Section 106c. conditioning of licenses.
*/ See, e.g., S. 3136, 89th Cong. (1966) and S. 1934 and H.R. 10727, 90th Cong. (19681; see also the FPC Annual Report, 1970 at pp. 7-8. A draft subsection proposed for Section 13 of what was to become the Clayton Act was ignored by Congress when presented by a spokesman for electric utilities: "These sections shall not apply to corporations accuiring or holding the stocks of or engaged in the business of conducting a public utility . . . . " 63rd Cong. 2nd Sess., Hearings before the Senate Committee on Interstate Commerce on Bills Relating to Trust Legislation (1914), pp. 347-359 at 355. A brief seeking to justify exemption from the antitrust laws on the
( m basis on existing state regulation was presented by utility companies. Id. at 1306. 229
- b. -There is Little Possibility of a Conflict Between AEC and FPC Jurisdiction.
As a general rule, regulation and competition are com-plementary rather than mutually exclusive schemes. Northern Natural Gas Co. v. F. P. C., 399 F.2d 953 (D.C.Civ. 1968). The regulatory scheme must be harmonized with the antitrust laws as much as possible. Consecuently, the courts have regularly found antitrust enforcement to be consistent with the existence of a substantial degree ~of regulation, except in cases where the antitrust relief sought conflicts directly and unavoidably with a fundamental policy of the regulatory scheme. Compare Keogh v. Chicano & Northwestern P.. R., 260 U.S. 156 (1922) and Georgia v. Pennsylvania R. R. Co. , 324 U.S. 439 (x (1944). */ Neither the " situation inconcistent with the antitrust laws" demonstrated in this case nor the relief requested by the Department to remedy that situation raises any substantial risk of conflict with the scheme of regulation under the Federal Power Act.
*/ Keoch and Georgia involved suits against similar rail-road ratemaking conspiracies. In Keonh the court held that a claim for damages rising from the ICC-approved rates would not lie since an award would constitute a preferential rebate inconsistent with "the paramount purpose of Congress [in enacting the Interstate Commerce- Act]--prevention of unjust discrimination" (260 U.S. at 163) . Moreover, under Section 8 of the Act the plaintiff could recover for unreasonably high rates. Georcia, however, upheld an injunction against the conspiracy since the ICC had no authority to regulate the conspiracy, and injunctive relief would confer no preferential benefits and thus not' conflict with the ICC's fundamental i regulatory goal.
x_ 230 s
\-
While no case has yet delineated the relationship between the Federal Power Commission and the AEC under its Section 105 authority, we believe that the FPC's mandate to incorporate the antitrust laws within its public interest standards, Gulf States Utilities, supra, * / and the established principles for determining the relationship between the anti-trust laws and regulation, Silver v. New York Stock Exchange, 373 U.S. 341, 357 (1962T; Thill Securities Coro. v. New York Stock Exchance, 433 F.2d 264, 268,269, 272 (7th Cir. 1970T; Otter Tail Power Co. v. United States, supra, provide rather clear guidelines for reconciling the regulatory schemes of the AEC and the FPC. (- Initially, a finding by the AEC on the cuestion of the inconsistency with the antitrust laws would obviously be bind-ing on the FPC, as would the AEC's finding as to the basic measure of remedies which should be included in appropriate license conditions. The.FPC is not authorized by the Federal Power Act or any other statute to determine violations of or inconsistencies with the antitrust laws or to enforce them. Northern Natural Gas Co. v. F. P. C., 339 F.2d 953, 960-61 (D.C. Cir. 1964). Further, the above-cited cases indicate that the'FPC would have no authority to prohibit what this i
/
/ See also Federal Maritime Commission v. Svenska Amerika
( Linien, 390 U.S. 238, 245, (196~/). 231 l i
4 pommission has recuired (or vice versa) except * / if it wereproperlytomakethefollowingthreefindings: (11 some overriding public interest would be achieved by permitting conduct which has resulted in an inconsistency with the anti-trust laws; (2) there is no other way to achieve this over-riding public purpose except by permitting the inconsistency with the antitrust laws to continue; and (3) the overriding public purpose was expressly recognized as an objective of the Federal Power Act. Accordingly, this Board has plenary jurisdiction to consider whether there is here a situation inconsistent with the antitrust laws and, if so, to fashion an appropriate 7-f set of conditions to. remedy it. In the implementation of such conditions, any cuestions involving rates at which
' wholesale power sales and wheeling would be effectuated, to the extent that they are subject to FPC jurisdiction, would, of, course, be passed on by that agency. Otherwise, there is' no occasion for this Board to refer any issue to the FPC cr refrain from ruling upon any issues because of a concern about conflict with the Federal Power Act. In the remainder of this s'ection ee will discuss the specilit a.eas uhere Applicant hes suggested that possible conflict with FPC jurisdiction may arise. ,
[N m
* / And, of course, only to the extent necessary to carry out the purpose of the Federal Power Act.
232
(1) Our proposed relief would require Applicant to make its transmission system available for reasonable wheeling of power for other systems. To " wheel or not-to-wheel" is largely a private decision of an electric utility since the FPC has disclaimed the general power to compel " wheeling." */
' City of Paris, Kv. v. K.U., 70 PUR 3d 45 (1967). When a utility subject to FPC regulation decides to make transmission services available, however, it must file a schedule of its rates, terms and conditions of service with the FPC.
The absence of FPC power to compel " wheeling" indicates neither a Federal policy against " wheeling" ** / nor the unavailability of compulsory " wheeling" to remedy a situation / inconsistent with the antitrust laws. This is precisely the holding of the Supreme Court in Otter Tail Power Co., supra. - With respect to the wheeling which the AEC is reauested by the Department of Justice to order Applicant to provide in ordertorectifythesituationinconsistentwiththeantitrubt
* / In some circumstances, a utility may be recuired to " Weel" power. For example, under Section 4(e) of the Federal Power Act, 16 U.S.C. 797(e), the FPC has the power to recuire wheeling as a condition to granting a hydrcelectric license.
F.P.C. v. Idaho Power Co., 344 U.S. 17 (1952).
** / To the contrary, a number of Federal policies recognize the economic advantages which wheeling can efford. .For example, a Department of Interior regulatien, 43 C.F.R. 2851.1 (5)(11), reauires the holder of a right-of-way for transmission facilities across public lands to wheel power for the Department of Incerior; the "Keating Proviso" reauires publicly owned utilities to " wheel" power over privately ouned facilities < whenever possible rather than construct a F'ederal transmission
(- line; e.g., 65 Stat. 25.5; 66 Stat. 451; 85 Stat. 369; and as noted above, the FPC can compel uheeling under Section 4(e) oof the Federal Power Act. 233
s laws, it should, of course, be consistent with the principles underlying numerous pooling contracts now on file with FPC. This would insure that there would be no AEC-FPC conflict when the FPC eventually exercises its jurisdiction over the rates, terms, and conditions of wheeling service. (2) The Department's proposed relief would reauire Applicant to engage in programs of coordinated development of new generating capacity uith the smaller systems of the lower Michigan peninsula. A coordinated development of generation involving equity participation cannot be compelled by the FPC and where undertaken voluntarily or by AEC mandate
-s, requires no action by the Federal Power Commission ,1f it is effectuated by means Hof an arrangement entered into prior to construction. */
(3) The Department's proposed relief would recuire Applicant to interconnect and enter into reserve-sharing arrange-ments with existing or proposed 'self-generating utilities on' an equalized percentage reserves basis. The FPC is authorized, under Section 202(b) (16 U.S.C. 5824a(b)), to order an electric utility to interconnect with another utility and sell or exchange energy on terms and conditions the Commission establishes. The FPC exercised this power in reauiring the Florida Power Corporation to interconnect and share reserves with the City of
* / Following construction, Section 203 of the Federal Power
[. Act (16 U.S.C. 5824bi, may recuire the FPC's approval of the \_ / - divestiture of generation or transmission facilities exceeding
$50,000 in value. However, as most coordinated developmenta will occur long before construction, there would be no AEC-FPC conflict since no FPC action is reouired or authorized at that stagd 234 o .
, Gainesville. Gainesville Utilities Department v. Florida i'
Power Corp., 40 FPC 1227 (1968). Thus, an AEC ordered inter-connection for reserve sharing under Gainesville principles should cause no conflict between the AEC and the FPC. Indeed, an AEC-imposed requirement for interconnection and reserve sharing-plainly will further the congressional policy under-lying the Feoaral Power Act -- to assure an abundant supply of electric energy throughout the United States with the greatest possible economy and with regard to the proper utilization and conservation of natural resources. (Section 202(a),16 U.S.C. 5 824(a)) (4) The Department proposes that the Applicant be required to engage in economy energy transactions with other systems in its area. Numerous economy energy rate schedules, ( which almost universally price the transaction on a split-the-
. savings basis (incremental and decremental cost) are on file with the Federal Power Commission, e.g. Public Service Comeany of Oklahoma, 25 FPC 656 (1961). In any event, the AEC's <
prescribing such relief would cause no conflict with FPC since 4 the latter agency would retain authority to revieu the rates involved. (5) The FPC's general approach toward the regulation of wholesale sales will not conflict with a requirement. that participation (by ownership or unit power purchase) in Appli-cant's nuclear units be made available to the small systems in its area. In the first place, Congress in enacting the
~.
235
-,--v~ - - , , - + - - - ,
(. ic - 1970 amendments was aware that access to nucicar power plants by third parties was envisioned. (91st Cong., 2d Sess.,. Hearing Before the Joint Committee on Atomic Energy on Prelicensing Antitrust Review of Nuclear Power Plants, Part 2 (1970), pp. 566, 613, 644, 663, 673; S. 2564 (90th Cong., 1st Sess.) (Aiken-Kennedy) 1967; 90th Cong. , 2d Sess. , Joint Committee on Atomic Energy Hearings on Participation by Small Electric Utilities in Nuclear Power, Parts 1 and 2 (1968). Secondly, the rate at which participation in the form of unit power purchases would take place would clearly be subject to FPC review. */ As the foregoing discussion demonstrates, action by the 7
- AEC to compel Applicant to undertake the above power pooling activities would not create any conflict with the FPC's regu-latory scheme and, a fortiori, no irreconcilable conflict.
*/ Although in South Carolina Generatina Co., 16 FPC 52 (1956),
a f f' d sub nom. Soutn Carofina Generating Co. v. FPC, 249 F.2d 755 (CA 4th, 1957); cert, den. 356 U.S. 912 (1957), the FPC, on its own motion, held illegal the pricing of a unit power transaction which included a charge representing a " split-the-savings" between the cost of the purchaser's next best alternative and South Carolina Generating's actual cost, this action was criticized in the 1964 National Power Survey as detrimental to coordination and power pooling arrangements. Federal Power Com-mission, National Fower Survev. 1964, Part II, Report of the Legal Advisory Committee, p. 380-387. Since that tLme the FPC has apparently recognized that surplus capacity transactions are consistent with coordinated development and thus with the Congressional mandate to secure an adecuate supply of low cost power (Sec. 202 (a),16 U.S.C. 9824 a (a)), and not inconsistent with its rate regulation policy for wholesales of firm power under Sections 205 and 206-(16 U.S.C. SS 824d and c). As matters now stand, negotiation rather than regulation sets the terms and conditions of surplus capacity transactions. Thus, the FPC noted ( in Connecticut Light and Power that the decision to depart from
~ average cost is a private one, and permitted bargaining to establish the terms. (FPC Opinion No. 701, Docket No. E-8105, July 22, 1974) 236 s
Carnation Co. v. Pacific Westbound Conference, 383 U.S. 213, 217-218 (1966); Thill Securities Corp. v. New York Stock Exchange, 433 F. 2d 264, 270 (7th Cir.1971); cf. Pan American World Airways v. United States , 371 U.S. 296 (1963) . The AEC has been specifically directed by Congress to insure, through its licensing authority, that the use of nuclear power will neither create nor maintain a situation i'nconsistent with the antitrust laws or their underlying policies. Since the legislative history of the 1970 amendments to the Atomic Energy Act makes clear that Congress rejected the proposition that the FPC should be the sole agency charged with the responsibility over bulk power supply coordination, * / _ and since the conditions to the license requested by the De-partment of Justice either do not involve matters within
'FPC's jurisdiction or duly allow for the proper exercise of such jurisdiction, this Board should order that the requested conditions be made part of the license, in order to give effect to the Congressional mandate that antitrust iderations be accommodated in the nuclear licensing process.
*/ See the discussion of legislative history contained in tee Department's Reply of the Department of Justice on Issues etc. Raised by Applicant's Answer of May 9,1972 filed June 9, 1972 which is incorporated,by reference herein. pp. 15,16.
s 0 237
, , -- , -m, e -
- 2. Applicant May Not Negate Federal Tax and Financing Policies as to Municipal and Rural Cooperative Systems by the Exercise of Private Mononolv Power.
- a. Alleged Tax and Financing Advantages Are Irrelevant.
Applicant has suggested that the existence of its monopoly power and its ability to exercise that monopoly powe'r are attenuated or limited by reason of the financing and tax advantages which municipal and rural electric cooperative systems enjoy under established federal policies. Through the testimony of its economic witnesses, Dr. Stelzer and Dr. Pace, Applicant asserts that these tax and financing advantages amount to " subsidies" uhich have an inevitdble distorting effect upon competition betueen those (' systems and Applicant; that because of those " subsidies" Applicant has been justified in imposing competitive "berriers" against the municipal and cooperative systems; and finally that the relief sought by the Department of Justice would be undesirable because it would increase economic distortions , brought about by those subsidies. */ Thus, for example, Dr.. Stelzer testified that:
* / While the initial claim was that Dr. Stelzer had taken into account the body of knowledge of " welfare economics" (Stelzer, cross,Tr. 6682T, which is a branch dealing with economic policy recommendations, after extensive cross-examination it developed that his views were only personal; and he was in disagreement with others he recognized as leaders in the field such as Hoteling, I.M.D. Little, and K. /irow. Under the rule of Reilly v. Pinkus, 338 U.S. 269 (11491, the admission of such treatises when utilized in : aat manner was recuired. The rule of Reilly v. Finkus is codiifed in the Federal Rules of f Evidence, Rule 803 (lot, 56 F.R.D. 184 at 302, 317, as an
( exception to the hearsay rule. 238
( If subsidized entities are permitted access to the generating and/or transmission economies of scale, and thereby extend the reach of their subsidies to customers now or otherwise to be served by privately-owned utilities such as Consumers Power, inefficient resource allocation will be increased. This argu-ment, carried to its logical conclusion, could be used to justify the erection of ' offsetting obstacles'
--a series of measures designed to neutralize the effect of subsidies. But such subsidized firms do make a contribution, for example, in providing the dynamic pressure on privately-owned utilities such as Consumers Power of yardstick competition, and in general serving as an alerting irritant. The task of public policy is to strike some sort of balance--
one which captures the advantages created by the presence of these subsidized entities uithout extending their scope so far as to result in exces-sive resource misallocation. (Stelzer, p.d. 18, 19) Through these contentions Applicant has injected into the proceedings a long-standing and heated controversy--the so-called "public power-private power fight." Whi[ ewe appreciate that in this first proceeding under Section 105c. the Board would desire to allow a wide scope of relevance in the introduction of evidence, we believe that the issues uhich the Applicant has raised here are largely irrelevant in i determining whether there is a " situation inconsistent with the antitrust laus" and in devising appropriate relief to remedy any such situation. For the reasons which we will set forth below, we do not believe that antitrust principles authorize Applicant to exercise monopoly power in order to counteract what it regards as economically undesirable Federal policies with respect to the taxing of its compet-itors. It is important, however, to make several preliminary points. 239
First, the " situation inconsistent with the antitrust laws" which we have demonstrated is not solely a matter of Applicant's having exercised its monopoly power against munici-pal and rural electric cooperative systems. There has also been persuasive evidence that Applicant has exercised its monopoly power against small privately owned systems such as Alpena Power */, and the relief which we seek would be avail-able to the small privately owned system on precisely the same basis as to the other systems which have been adversely affected by Applicant's conduct. Second, there is an implication in Applicant's argument that the Department has tota:ly ignored the existence of , municipal and cooperative and tax financing advantages in the presentatien of its case. Thct implicatien is mislead-ing. In fact, the Helfman engineering study, which was designed
.. to show the manner in which denial of access to power exchange services severely limits the ability of small systems in the '
lower peninsula to pursue economic programs of bulk power extension, explicitly took account of the financing costs which municipal and cooperative systems have been experiencing and will be likely to experience. Thus, we'have demonstrated the seriously adverse effects of Applicant's exercise of its monopoly power, notwithstanding the tax and financing advan-tages available to municipals and cooperatives. , (,'"
*/ Rogers City Power Company, a private corporation electric utility, was acouired by Applicant in the 1960's.
(D.J. No. 159) 240
While the tax and financing situation of the municipal and cooperative systems has a relevance to this proceeding in the limited sense in which they figured in Mr. Helfman's calculations, we submit, for the following reasons, that Applicant is wrong in suggesting their broader relevance. (1) The tax and financing advantages of municipal and cooperative systems to which Applicant objects are not the product of accident or inadvertance. They are, on the con-trary, expressed and conscious governmental policies. In addition to the long-standing Constitutional.. interpretation which precludes the Federal taxation of state and local
-- governmental operations, the Federal Government has specifically recogniced the valuable function of nonprofit electric systems in providing a counterweight to the dominance of privately owned systems by enacting a series of statutory provisions, including a provision in the Atomic Energy Act itself, granting the non-profit systems preferential access '
to Federally developed electric power resources. */ The favorable interest rates which have been heretofore available to rural electric cooperatives are the direct result of a Congressional policy favoring the extension of electric power service to< low density rural areas. To the extent that Appli-cant disagrees with these policies or regards them as out-dated, it, of course, retains its Constitutional rights under the First Amendment to urge Congress that these. policies be (
*/ Sec.44, 42 U.S.C. 2064.
241
1 s, changed See Eastern Railroad Presidents' Conference v. Noerr Motor Freicht, Inc. , 365 U. S. 127 (1961) ; United Mine Workers
- v. Pennington, 381 U.S. 657 (19653.
(2) While the broad outlines of the Federal policies with respect to the tax and financing position of nonprofit electric systems has been stable over the years,.important changes can be made and have been made in the details. There-were two major examples du_ing the course of this proceeding. First, there has been a recent change (P.L.,93-32.(May 11, 1973T;.87, Stat. 65, 7 U.S.C. 901-905b) in REA's provisions for the financing of rural electric cooperatives, increasing the interest costs substantially, * / parti.cularly with respect to cost of money for bulk generation and transmission which is now obtained at close to market rates. Secondly,
'the recent promulgation (after several years of dispute between public and private power interestsT by Internal Revenue Service of regulations (37 F.R. 15485) under Section 103(c) of the Internal Revenue Code as amended in 1968, 26 U.S.C. 103(c) (P.L. 90-364; 82 Stat. 251, Sec. 107),
makes it more difficult for municipal revenue bonds to cualify for exemption from Federal income tax on 'i6terest payments. These major changes and the possibility of others in the future demonstrate how precarious it would be for the , Board to allow
\
*/ Sec. 305b provides for a standard insured loan rate of
.( . , lEC, up from 2% under the 1944 Pace Act direct loan program. 242
f' . Applicant to continue to exercise its monopoly power based upon a present assessment of the compensating value to municipal and cooperative systems of their current tax and financing advantages. (3) If it were relevant to consider the value to municipal and cooperative systems of certain Federal tax and financing policies, it would become necessary to evaluate the advantages and " subsidies" which Applicant and other privately-owned electric systems enjoy. Unless this were done, it would be impossible to calculate the precise amount of advantage enjoyed by nonprofit systems and the precise degree of exercise of restric-f tions on municipal power which could be justified as counteract-t ing that advantage. '* / The most important area in which privately-ouned electric systems enjoy tax advantages not available to other taxpayers is in depreciation accounting.
*/ The Senate Finance Committ'ee has raised cuestions as t whether private corporations improperly claimed " subsidies" on the part of their public power adversaries when they failed to disclose their own " subsidies" in licensing proceedings before the F.P.C. ; 85th Cong. ,1st Sess. , on S.1795 (Rapid Amortiza-tion of Emergency FacilitiesT (1957T, p. 63; and the Senate Antitrust and IIonopoly Subcommittee held similar hearings to determine to what extent " tax writeoffs are being used as a Government subsidy to create monopoly control and undue con-centration in the field of electric power." 85th Cong., 1st Sess., Hearings before the Senate Antitrust and Monopoly Sub-committee pursuant to S. Res. 57 (1957T, pp. 1, 2.
The amounts of such subsidies for large private corpora-tion electric utilitics were listed by Senator Aiken in an appendix to the Hearings on the Aiken-Kennedy bill, part of the legislative history of the 1970 amendment to Section 105. \ . 243 m
i General accounting principles provide for matching cost with revenues and spreading the cost of a capital asset over its useful life. Two provisions of the Federal Income Tax Code provide for faster write-offs and thus, in a static company, would result in a lower income for the early years, a higher income for later years. However, in a constantly growing system such as an electric power system, the period of over-normal payment may never., occur. ( Pace , cro s s , Tr. 7727) The provisions include Sections 168 providing for accel-erated amortization, cnd regulations under Section 167, liberalized depreciction, providing for " asset depreciation
- range" or super-liberalized depreciation.
[ ' The importance of these depreciation provisions (together with the provisions on investment tax credits) is demonstrated by the evidence in this record as to Applicant's Federal tax payment. In computing Applicant's cost 'o f service the Federal Power Commission included a figure of some $40 million as Federal income tax payments in the test year. The record shows that in the most recent year, Applicant, in fact, paid no Federal income tax whatsoever, receiving instead a $3 million
'~
tax credit (Pace, cross, Tr. 7706-7) In the previous year it paid taxes couivalent only to 1 1/2% on electric revenues. (Gutmann, cross, Tr. 4912) Dr. Pace could not testify whether in an; year since 1960 Applicant had paid as much as 15% of its income in Federal taxes. (Pace, cross, Tr. 7731) { 244 m --
( The extraordinarily complex and shif ting nature of the fac-tors which the Board uould have to consider in order to determine quantitatively the extent of the advantage enjoyed by nonprofit-systems provides a further strong reason why the issue of "sub-sidies" should not be relevant in a Section 105c proceeding. (4) While the question has arisen only infrecuently, all the antitrust precedents of any relevance suggest that a monopo-list takes his victims as he finds them and is not entitled to contend that its anticompetitive conduct is offset by their extrinsic competitive advantcget b'. Relevant Antitrust
- Decisions In American Federation of Tobacco Growers v. Neal, 183 F.2d l',
869 (CA-4, 1950), Chief Judge Parker considered an issue cuite similar to the one raised here. The American Federation of Tobacco Growers was a farmers' cooperative ouning a tobacco warehouse located just outside the corporate limits of the City of Danville, Virginia. The defendants were the Danville Tobacco Association, which controlled the selling of tobacco on the Danville Market, and individual tobacco warehousemen of Danville who were members of its executive committee. Danville, Virginia, was one of the lar' gest markets in the Bright Tobacco Belt. There were a number of tobacco warehouses in the city to which farmers brought their tobacco from the sur-round*.ng territory; and in these warehouses it was sold at auc-
, tions subject to the rules of the Board of Governors of the
(' - Bright Belt Warehousemen's Association. The rules required appor-tionment of limited selling time among the various warehousemen by the defendants. The court found "of supreme importance to 245
every warehouseman is the allotmsne of selling time, since the allotment .made by the association is respected by the buyers ( and it is not practical to conduct auction sales except in accordance with the allotment." The court found that "by their control of the allotment of selling time, defendants had it within their power to exclude plaintiff from the Danville market . . . that plain-tiff was excluded therefrom and eliminated as a competitor as a result of their exercising the power." Defendants attempted to justify the exclusion on the ground that since plaintiff paid lower taxes and had lower building costs outside of the city, access to the Danville market would give it an unfair advantage. Judge Parker strongly rejected the
" flimsy" defense.(183 F.2d at 872., 874)
To say that a board of trade whose members have [- monopolistic control of a market may exclude an outsider who vishes to compete therein merely because he has an advantage in. taxes or construc-tion costs is to advance a proposition that has no
. support in any decision uith unich we are faniliar, and none has been cited in support of it. Persons trading in and controlling a market, who have a heavy expense because they operate in an expensive building, would certainly not be justified on that
- account in excluding from competition a prospective competitor who was not burdened by such an expense; but there would be just as much reason in this as.
in permitting them to exclude him because his warehouse or factory was not subject to city costs and taxes. A restraint of trade involving the elimination of a competitor is to be deemed reason-
^
able or unreasonable on the basis of matters affect-ing the trade itself, not on the relative cost of doing business of the persons engaged in competition. In the Otter Tail case, the district judge consistently ruled that the motivation of a municipality for wanting to s establish a municipally- owned electric system was totally irrelevant to the antitrust issues raised by Otter Tail's efforts to prevent its establishment. For example, at one point he stated: 246 %
' \
The Court: That would be all right if you were
~
in a campaign up there in Otter Tail County or some-where, but we are only concerned here with whether or not Otter Tail's been operating a monopoly to the grejudice, isn't that all we are concerned with here? The merits or de=erits of public ownership aren't involved or whether its good or bad to own a plant or whether Otter Tail was doing a good job. If we went to all that we will be here until Christ-mas or shortly after, I suggest. */* The issue was not raised in the Supreme Court except most indirectly by Otter Tail's complaint over the possible " erosion" of its system by municipalities establishing their own systems. The Supreme Court rej ected the argument. In a broader content, antitrust courts have been relue-tant to hold that the survival, or even prosperity, of a victim of an antitrust violation eliminates the need for antitrust remedy. Thus, in Utah Pie Co. v. Continental Baking Co. , 386 U.S. 685, 702 (1967), the Tenth Circuit Court of Appeals had found that there uas insufficient evi-dence to support a finding of probable injury to competition because of the growth and prosperity of the alleged victim. - The Supreme Court reversed, holding, "we disagree with its apparent view that there is no reasonably possible injury to competition as long as the volume of sales in a particular market is expanding and at least some of'the competition in the market .-continue to operate at a profit."; 356 U.S. at 702
*/ Supreme Court of the United States, October 1, 1971, Otter Tail Power Co. v. U. S.,lio. 71-991. Appendix Trans-cript of tne trial before the United States District Court
( for the District of Minn., Vol. 1,p. 300, m 247
( In any event, it should be noted that the record is not all one sided as to the prosperity of cooperatives and municipals. While Applicant has presented studies of the prosperity of its municipal and cooperative competitors, it was acknowledged that retail rates in cities would tend to be lower and cooperatives' rates would be higher than Applicant's because of differences in population densi-ty. It is noteworthy that the cooperatives felt the need for protection from Applicant's one-at-a-time competition, the need manifesting itself: (1) By the seeking of legislation for complete terri-l torial allocation which was opposed.by the " big" utilities. (D.J. No. 270) , (2) By their voluntary submittal to the jursidiction of the Michigan Commission for the purpose of receiving protec-tion from what they viewed as destructive competition by Applicant.(D.J. Nos. 8, 188) (3) By their proposal to make the proposed three-phase rule cover large loads up to G00 kv or comprehensive while in contrast Applicant preferred competition for all loads over 25 kw. Other evidence shows that Applicant viewed the G & T cooperatives in the early ,1960's as close to insolvency. (D.J. No.174) ) I' s
~
*/ D.J. No. 187 is an internal memorandum of Applicant considering the possibility of buying the two G & T's.
248 o -
s D.J. No. 124 noted the possibility of taking over the South-east Coop, which was having financial problems. (D.J. No. 124, p. 2) Finally, while the record shows that two municipals */ went completely out of business during the test period and two ** / abandoned the generation function, the record does not disclose that any entered the retail distribution or the bulk supply function. In conclusion, we submit that all the relevant considera-tions--both those of principle and those of trial expediency-- require the rejection of Applicant's " subsidy" defense. The antitrust remedies which we are proposing here will simply bring Applicant's conduct into line with that being observed by many utilities throughout the country who, despite their philosophical opposition to public power, have agreed to deal with municipal and cooperative systems on reasonable and non-i discriminatory terms. As the Legal Advisory Report of the Federal Power Commission 1964 National Power Survey put it: l l Some in the industry pay considerable attention l to the relative competitive situations of the l separate segments. There is a tendency among some l in the investor-owned systems to regard the economies i of scale ~ accessible to them as a competitive partial offset to their greater costs of taxes and capital which we have described in Chapter II, Section 2, and to their subordinate status in purchasing power at the low rates available from federal hydro-electric developments which we have described in Chapter V, Section 2. Such a focus can give rise
*/ Allegan & Grayling.
** / Charlevoix and Petoskey.
249
to apprehension that inter-segment power pooling would deprive them of their competitive burdens, and thus tip the present competitive balance against the investor-owned systems. The competi-tion seen in this context may be in terms of attrac-tion of particular customers, or public reaction , to differing rate levels of adjacent suppliers of electricity. Despite these fears, and with whatever sub-stances they may have, we observe that in situation after situation the various segments of the industry are in fact entering into power pooling transactions, sometimes of great complexity, as the developing technology increases the advantages of power pooling. Thus there is good reason to believe that the various
, segments of the industry will find that it is possible to achieve a greater degree of power pooling and coordination while, at the same time, continuing to espouse vigorously the differing points of view with respect to which changes, if any, would be made in I the existing legislative, regulatory,-tax and related framework within which the industry operates.
(FPC National Power Survey Legal Advisory Report II,
- p. 387) i e
T s I q . 250 s 1.
VI. RELIEF REOUESTED BY DEPARTITdT OF JUSTICE
'( A. PROPROSED LICENSE CONDITICNS t
The Department proposes that Applicant be required, as conditions of the Midland licenses, to: (1) grant equal partici-pation in the Midland units and all future nuclear units installed by the Applicant for the term of the instant license as it may be supplemented; (2) sell bulk power at wholesale for resale to any person engaging or proposing to engage in the sale of electric power at retail; */ (3) interconnect and share reserves with any electric utility in its area engaging or proposing to engage in the generation and transmission of electric power, on fair reserve-sharing principles equivalent essentially to those required by the Federal Power Commission in the Gainesville decision; (4) engage in coordinated development 7 with any electric utility engaging in or proposing to engage in bulk power supply with which Applicant is or may feasibly be interconnected, by incorporating the load requirements of such utility or utilities into the load requirements of Applicant I and/or the Michigan Pool and cooperating in planning and con-structing large base-load units to satisfy the pool load growth ' requirement, where Applicant's share of the cost of such l cooperative venture would not exceed Applicant's cost witheJ-t
*/ When the time comes for the Board to specify detailed t
l
. Ticense conditions, the Department will sucgest an appropriate limit on such obligations to preclude theli being onerous.
251
such coordination; and to provide, for reasonable charges, the transmission services associated with such coordinated develop-ments; (5) provide wheeling services so that independent systems and others may coordinate development one with the other, or as a group, for short terms based on Applicant's incremental costs, or over longer terms (longer than five years) at average system costs; (6) provide other coordinating arrangements, such as maintenance power, and economy energy, on reasonabic terms; and (7) advise each major neighboring utility and each smaller utility in Michigan's louer peninsula that it will not directly or indirectly enter into, adhere to, continue, maintain, renew, enforce or claim any rights under any contract,' agreement, under-standing, joint plant or joint program with any other electric utility system to limit, allocate, restrict, divide or assign, or to impose any limitations or restrictions respecting the persons to whom, or the markets or territories in which, any other electric utility may hereafter sell or supply firm power in bulk or power exchange services. . The Department respectfully requests that following the Board's findings on inconsistency, it be permitted to consult with the other parties to frame proposed licen5e conditions consistent with' the Board's order. The Board should provide that, if the parties are then unable to agree on such conditions, the respe:tive parties file proposed conditions and the Board hear oral argument thereon. . ( (
B. THE REQUESTED RELIEF IS " APPROPRIATE" WITHIN ( THE MEANING OF SECTION 105c. (6) Section 105c. (6) of the Atomic Energy Act comes into play after a finding under Section 105c. that license activities would create or maintain a situation inconsistent with the antitrust laws. It provides: In the event the Commission's finding under para-graph (5) is in the affirmative, the Commission shall'also consider, in determining whether the license should be issued or continued, such other factors, including the need for power in the affected area, as the Commission in its judgment deems necessary to protect the oublic interest. On the basis of its findings, the Commission shall have the authority to issue or continue a license as applied for, to rescind a license or amend it, and to issun a license with r.uch conditions as it deems appropriate. (Empnasis accea) ,
'~
The Report by the Joint Committee on Atomic Energy on the 1970 amendments to the Atomic Energy Act sets out authorita-tively the role Congress intended for Section 105c. (6): Paragranh (6) provides that if the Commission finds "the activities under the license would . create or maintain a situation inconsistent vith ' the antitrust laws as specified in subsection 105a." that the Commission "shall also consider, in determining whether the license should be issued or continued, such other factors, including the need for power in the affected area, as the Commission in its judgment deems necessary to protect the public interest." On the basis of all its findings-- the finding under paragraph (5) and its findings under paragraph (6)--the Commission would have the authority "to issue or continue a license as applied for, to refuse to issue a license, to rescind a license or amend it, and to issue a license with such conditions as it deems appropriate." While the Commission has the flexibility to consider and weigh the various interests and objectives which !'s 253 4 O , , _ , ---r--
(- may be involved, the committee does not expect that an affirmative finding under paragraph -(5) Commission would normally need to be overriden findings and actions under paragraph by(6) . The Co:rmittee believes that, nrcent in an extraordinary situation. Commission-imnosed conditions caould be able to eliminate tne concerns entailed in any aftirmative findina under naratraon (5) uhile, at the same time, accommodating the other public interest concerns found pursuant to paragraph (6). Normally the committee expects the Commission's actions under paragraph (5) and (6) will harmonize both antitrust and such other public interest considerations as may be involved. In connection with the range of Commission discretion, the cormittee notes that pursuant to subsection 105a. the Commission may also take such licensing action as it deems necessary in the event a licensee is found actually to have violated any of the antitrust laws. Of source, in the event the Commission's finding under paragraph (5) is in the negative, the Commission need not take any further action regarding antitrust under subsection 105c. ',
- S. Rep. No. 91-1247, H.R. Rep. No.'91-1470 (1970) , p. 31. (Emphasis added)
Congress vanted the Commission to impose conditions to eliminate the concerns entailed in findings of antitrust inconsistency-- i.e., conditions to eliminate the situation inconsistent with the antitrust laws. In the context of this proceeding, the conditions must provide means of access to coordination to. those systems who are denied such access by the Applicant. These conditions are necessary to insure that activities under the Midland licenses cannot have the effect of maintaining a situation inconsistent with the antitrust laws. The Commission (and here by delegation the Board) thus has the authority on the basis of its findings "to issue a license with such conditions as it deems appropriate." - ,q 254 s
---n- -- , , - . - - . ,
\ We note that the question of " nexus" at the relief stage under Section 105c. (6) differs from that discussed above under Section 105c. (5) . Once the finding of ne::us has been made--i.e. ,
that the license activities would create or 1,aintain a situation inconsistent with the antitrust laws--the focus shifts to the relief appropriate to climinate that situation. The " nexus" or relationship the Board must then consider at that stage is one of appropriateness--i.e. , whether the proposed license conditions
' are armronriate to eliminate the situation inconsistent with the antitrust laws.
Appropriate conditions may directly involve license activities (e.g., participation of othe. : systems in the nuclear unit) or they may not (e.r:. , provision of transmission services, or keheeling, to acco:modate coordinating transactions among other systems pcnitting then to install their own nuclear generation or other generation more competitive with nuclear power). Both would be appropriate for imposition by the Board to eliminate the / antitrust-inconsistent situation in this proceeding. None of the relief the Department proposes would in any way conflict or be inconsistent with the jurisdiction of the Federal Power Commission, as noted above, pp.'230-237. The FPC does have authority to grant certain of the relief requested here; however, its jurisdiction to do so is not exclusive or even pri.ary. Otter Tail Pouer Co. v. United States, 410 U.S. 366 (1973). , (' 255
,, . . - . . _ - - - - . .- . . ~ - --
4 f,, k Other relief sought here would be beyond the FPC's statutory authority to impose upon electric utilities. It would be within the jurisdiction of an antitrust court, i however, in fashioning its decree to cure an antitrust. viola-1 i tion, id., and the Atomic Energy Coinnission likewise may grant j j such relief to insure that activities under its nuclear- ) c licenses do not create or maintain situations inconsistent with the antitrust laws. C. THE ISSUE OF CC"PELLED RETAIL 10i2ELIMG . During the last evidentiary session in this proceeding, Mr. Clark, speaking for the Board, requested that the parties j , state their views on the imposition of retail wheeling as a ! taeans of eliminating a series of asst:ntd retail monopolies. (Tr. 9283) i Ifnile theoretically such retail wheeling would appear , possible from both a technical and economic point of view, ,.' the record is for all practical purposes silent on this question. The sole testimony regarding retail distribution ;
- system wheeling dealt with a somewhat unique situation in which Traverse' City proposed to place distribution facilities underground as part of an urban renewal program. . (h'olfe ,
direct, Tr. 2035-6) , On the other hand, the record is replete with gvidence which reflects the body of trade practice among utilities I
~
256
indicating the economic feasibility and desirability of wheeling as a part of coordination of generation and trans-mission. See, for example, the Edison Electric Institute reports, (D.J. Hos.167 and 234) and a history of government reports quote'd above. Moreover, the evidence clearly demon-strates the benefit of alternative sources of power supply (whether wholesale-for-resale or coordinating) in achieving lowest possible cost */ and the necessity of wheeling if the systems surrounded by Applicant are to obtain such alterna-tive s .**/ Uo st eh evidence regarding retail wheeling was introduced. Thus, any recommendations by the Department on the advis-ability or propriety of retail wheeling would be conjecture and would require speculation as to its technical and economic feasibility, as uell as to the competitive benefits such uheeling uould engender. Had this issue been raised earlier in the proceeding, the Department could have investigated the pre- ,. sented evidence to satisfy the Board's interest. We regret that the evidence of record permits the Department to go no further.
*/ Paul , cro s s , Tr . 8216 ; Aymond , cro s s , Tr . 6627-28. **/ Mayben, cross, Tr. 2937; Munn, cross, Tr. 4123.
1 257 e .
f (s VII. PROPOSED FINDINGS OF FACT AND CONCLUSIOUS OF LAW
- l. There are three relevant product markets for electric power in Michigan's lower peninsula: (a) power exchange (power and services), (b) bulk firm power supply or wholesale firm power, and (c) retail firm power. D.J. No. 197, Wein p.d. 54,55.
- 2. Power enchange services are factors of production for the product bulk nr wholesale firm oower sucoly and are not (by themselves) interchangeable with the final products. Pace, cross, Tr. 7544.
- 3. Factor markets are not the same markets as the final productmarketsforthosewhohavethepurposeofbntering i
or remaining in the business of generating firm power in bulk for sale at wholesale or for use in a retail distribution system and the purpose of the user must be considered. U.S. v. E. I. DuPont deUemours & Co., 351 U.S. 377, -
- 4. The relevant geographic market for bulk firm pouer supply consists generally of, Applicant's service area plus those loads Applicant can technically and economically reach from its enisting integrated system depending on the size of the load and the distance from Applicant's existing facilities. Wein, p.d. 71. Mayhen, direct, 2744. D.J. No. 197.
U.S. v. Philadelphia National Bank 374 U.S. 321, 359 (1962), e 258 s
# e
( 5. The same boundaries generally define the relevant retail markets. Mayben, direct, Tr. 2749.
- 6. It would be inappropriate, in establishing geographic markets, to consider barriers to entry caused by a firm's oun anticompetitive conduct. Supra,pp. 7,_g4,
- 7. Where.without restrictive practices, actual or potential wholesale and retail competitors can surmount natural barriers to entry, submarkets based on differences in natural barriers to entry,would be inappropriate. Pace, cross, Tr. 7320.
- 8. The geographic bounds of the power exchange market cannot be preciscly defined but consists generally of the
,/ northern ECAR area plus Ontario Hydro. Mayben, direct, \ Tr. 2763.
- 9. The e::istence and exercise of Applicant's market power to control output (including price) of power exchange services to entities with which Applicant is in actual or potential competition in two other markets (wholesale firm power and retail firm power) is the principal issue in this proceeding. Tr. 824, Prehearing Conference Order dated Aug. 7, 1972.
- 10. In the relevant bulk supply and retail markets for firm power there is significant competition from small systems including municipal and cooperative electric utilities of the sort protected by the antitrust laws. This was the type of i-
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259
competition which was spacifically referred to in the hearings when Congress was considering and enacting Section 105 (c), * / and during its 1970 revision. Testimony of Leland Olds, 83rd Cong. 2nd Sess. Hearings Eefore the Joint Committee on Atomic Energy, on S. 323 and E.R. 8862 to Amend the Atomic Energy Act of 194 6 p.p. 529, 530; Statomont of Senator Aiken, 91st Cong. 1st Sess. Hearings Eefore the Joint Committee on Atomic Energy (April, 1970) Part 2 Appendix 1 p. 553; U.S. v. Phillins Petroleum Co.,367 F. Supp. 1226 (C.D. Cal. 1973), aff'd, 42 U.'S.L.W. 3710,' July 8, 1974: _o'tterTakl Power Co. v. U.S. 410 U.F. 366 (1973),
- 11. Access to the power exchange market on fair terms can and does promote competition in the other two markets, k
Aymond Int. No. 1004, pp. 183-184) D.J. 200-203 J Stolzar p.d. 18; Pace, cross, Tr. 7311, 7312.
- 12. With the exception of the Detroit Edison Company (to the east) and American Electric Power Company (in a small area in the southwest cornor) Applicant dominates the genera-tion, transmission and retail distriP ion business throughout the lower peninsula of liichigan. D.J. Jo. 1, D.J. No. 18, D.J. No. 21, D.J. No. 109
*/ Other than the patent monopolies concerning the supply Industrics dealt with in Section 158.
i t 260 4 1
l i 13. Applicant's generation and transmission constitutes an individually-owned power exchange, giving it access to sufficient pouer exchange services to enable it to install larger generating units than its actual or potential com-petitors and to use these to sell wholesale firm power or for supply to its retail distribution systems. Mayben, cross, Tr. 3709.
- 14. Applicant's power c:: change arrangements with adjacent utilities in the regional power exchange market for (1) renr- e sharing, (2) whecling, and (3) coordinated develop-ment have enhanced its ability to install still larger un.i tc, including 800 megauatt nuclear units, without degrading the i quality of.its power supply below that necessary to market wholcsale firn power or bulk firm supply. Mosley. direct, 8492, 8499, 8511, 8516.
- 15. But for its interconnections and contractual access i .
to the power enchange market Applicant could not market electric power in bulk from its existing system with the 800 mw nuclear units to be added at the Midland Plant while still maintaining adequato reliability of power supply without a substantial increase in reserves. Int. No. 1005, pp. 36, 37; Lundberg, 'Tr. 9049, p.d. attach J.R.L.-5 p.I
- 16. Applicant's dominance in generation,' transmission and retail distribution, enhanced by its existing contracts and combination in power pools uith others -- including but 261 s
e
f ( not limited to Detroit Edison, AEP system, Commonwealth Edison, NIPSCo, Toledo Edison -- gives it the ability to deny access to the power enchange market, a submarket consisting of the demand for and supply of power exchange services needed by or surplus to electric power systems which are Applicant's actual or potential competitors in the wholesale firm power and retail firm power markets. In this submarket Applicant has the power to control price and output of power exchange services, enabling it to affect the costs of its competitors in the other named markets. Pp. 97-167, supra.
- 17. By insisting on " mutual benefits" when it has monopoly power, Applicant obtains more than its costs
~
(including a reasonable return) for power enchange services,
'~
and obtains a substantial portion of the extra value of the
' service, indicating the exercise of monopoly power. Pp. 144-159, supra,
- 10. Applicant has denied (outright or by denial of reasonable terms) its competitors' access to the regional power exchange with the intent to retain its dominance in the wholesale firm power and retail firm power markets and
~'
with the anticipated and actual offect of retaining such dominance. Pp. 8 7 - l'G 7 , suora.
- 19. Applicant's few grants of very limited access to the regional power exchange which have been on less onerous terms and conditions have been uith the intent and anticipated 262
( offect of forestalling the growth of alternative power ex-change sources, E.g ., D .J. No. 150 ; Mayben Tr. 2637-2638.
- 20. The foregoing findings (1-19) constitute an existing situation regarding the marketing of power exchange services and bulk firm power supply throughout most of Michigan's lower peninsula (specified in D.J. 197) which is inconsistent uith the antitrust laws. Pp. 163-266, supra.
- 21. While fossil fuel units may be obtained in small sizcs (albeit at higher costs) , commercial nuclear units are restricted in sino to a minimum of 500 mw. Mayben, cross, Tr. 2008. .
- 22. Without access to the power exchange market, Applicant's competitors in the wholocale firm pcNer market will be unable to install nucicar generation and will be placed at a competitive disadvantage in the latter market because ownership of their own bulk powcr supply will be infeasible or relatively loss feasible. Pp. 168-182, supra.
- 23. Conversely, uith restrictions on access to th'e power exchange market removed, these small systems may be able to louer their bulk power supply costs belou the cost ,
of purchased power from Applicant and thereby improve their competitive position in both the wholesale firm power market and in the retail firm power market. D.J. 200-2'03; Pace, cross, Tr. ~7311-12. 263
- 24. Due to uncertain availability and rising prices of fossil fuel, Applicant's cost advantage in wholesale firm power vis-a-vis its small competitors will be increased if it can continue to deny these competitors access to the power ex-change market and thereby prevent them from owning or controlling nuclear generation while it itself installs nuclear generating units. D.J. 200-203; suora; pp. 218-227 ,
- 25. It has been Applicant's intent and purpose to monopolize the wholesale firm power and retail-firm power markets in most of Michigan's lower peninsula. D.J. 187, 188; Paul, cross, Tr. 7959-63, 8267-60.
- 26. An effect anticipated by Applicant in foreclosing
( its competitors from the regional power exchange market is to increase the cost of bulk power supply to small systems
'and thereby restrain competition at wholesale and at retail by requiring these systems to buy from Applicant rather than bu.ild or own their own generating and/or retail distribution system. Paul, cross, Tr. 7974-76; D.J. No. 173.
- 27. The use by Applicant of monopoly power in one market l (the power exchange market) for the purpose or with the i .
anticipated effect of retaining or extending monopoly power in another (the bulk supply and/or retail markets) falls within a well ' established category of the antitrust law viola-tions. Packaacd Programs. Inc. v. Westinghouse Broadcasting' 2:3 F.2d 703 (3rd Cir. 1958); Six Twenty-Nine Productions v. I
\ P.ollins Telecasting, Inc. 365 T.2d 473 (5th Cir. 1966).
264 s
l l \-
- 28. Applicant's regional transuission system is a unique resource because of environmental and cost reasons and its refusal to grant to others reasonable access to that unique resource falls withi.i another well-established category of antitrust law violation. D.J. 1; pp. 98-122, supra; Brush, cross,Tr. 2336 U.S. v. Terminal Railroad,.224 U.S. 383 (1912).
g
- 29. The foregoing would be sufficient to establish violations of Sections 1 and 2 of the Sherman Act: Section 2 based on Applicant's monopoly power over generation and trans-mission in the lower Michigan peninsula and .the exercise of such power; Section 1 based on its pooling arrangements with Detroit Edison and others which exclude the smaller systems, and on the " gentlemen's agreement".concerning wholesale power sales to small systens to which Applicant has been a party. Otter Tail Power Co. v. U.S., 410 U.S. 366 (1973);
Associated Press v. U.S.,_326 U.S. 1 (1945).
- 30. Even without proof of intent and anticipated effect (Finding Mos. 25 and 26) , the foregoing Findings 1 through 24 are sufficient to establish the existence of a situation inconsistent with the antitrust laws. S. Rep. No. 91-1247; H. Rep. No. 91-1470 (197 0) , . p. 14.
- 31. The activities under the license, namely the financing, construction, operation, and sale of lou-cost power from_the Midland nuclear power units will continue or maintain (and in 265
-. .#. _ .g- . - _ . . - - ,
/ \' all probability exacerbate) a situation inconsistent with the antitruct laws (within the meaning of Section 105c.,(5) of the Atomic Energy Act of 1954 as amended) unless Applicant is required to afford its competitors access to the regional power exchange raarket on reasonable terms. D.J. 200-203.
- 32. Section 105c,(6) , inter alia, requires the Atomic Energy Commission, on the basis of a finding of such incon-sistency as the foregoing, to issue a license with conditions it deems appropriate to correct'that situation.
- 33. Conditions requiring Applicant to afford its com-pctitors access to the regional power exchange market on reasonable terms and conditions (in effect those that would
( prevail between buyers and sollers with equal bargaining strength) would be " appropriate" within the meaning of Section 105c,(6) .
- 34. Such conditions wo'uld " effectuate the purposes of i
this Act" within the meaning of Section 183 of the Atomic Energy Act by "encourag[ing] uidespread participation in the development and utilization of atomic energy" as intended by Section 3 of the Act. .
- 35. So conditioning the license vould " strengthen free competition in private enterprise" within the meaning of Sectior 1 of the Atcmic Energy-Act.
4 266
\ Where an applicant for a license for a nuclear 36.
power plant, such as Applicant herein, (1) has the power to grant or deny access to coordination to its actual or potential competitors at wholesale or retail and (2) has exercised that power with the effect of acquiring or retain-ing any part of a wholesale or retail electric power market, that constitutes a situation which is per 3 inconsistent with the antitrust laws and theapolicies: clearly underlying those laws; the activities of such an applicant under the license would maintain that situation. 6 $ b lw , i e . s 6 i La 267 s
/- CONCLUSION In light of the evidence and applicable law set forth above, the Department of Justice requests the Board to adopt the Department's proposed findings of fact and conclusions of law and to issue an order conditioning the Midland licenses as ue herein request. October 8, 1974 (s
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- - A...<,,;c.,~.
MILTOM J..- GROSS 102;
,:iL UALLACE EDWARD Bl'an D _
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DAVIDi: . lA. LECKlE* e ~.5 - C. FOidEST BAhlkus Attorneys, Department of Justice i. 49 9 k s b s k
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( UNITED STATES OF AMERICA \ BEFORE THE ATOMIC ENERGY COMIISSION In the Matter of )
)
CONSUMERS POWER COMPANY ) Docket Nos. 50-329A Midland Nuclear Plant ) 50-330A Units 1 and 2 ) CERTIFICATE OF SERVICE , I hereby certiry that ccpies of BRIEF AND PROPOSED FINDINGS OF FACT OF THE UNITED STATES DEPARTMENT OF JUSTICE, dated October 8,, 1974, in the above-captioned matter have been served on the follow-ing by deposit in the United States mail, first class or air mail, this 8th day of October, 1974: Honorable Hugh K. Clark Mr. Frank U. Karas, Chief Atomic Energy Commission .Public Proceedings Branch Post Office Box 127A Office of the Secretary Kennedyville, Maryland 21645 of the Commission U. S. Atomic Energy Commission Honorable J. Venn Leeds, Jr. Washington, D. C. 20545 Atomic Energy Commission Post Office Box 941 William W. Ross, Esquire Houston, Texas 77001 Keith S. Watson,' Esquire Wald, Harkrader & Ross Atomic Safety and Licensing 1320 Nineteenth Street, N.W. Board Panel Washington, D. C. 20036 U. S. Atomic Energy Commission Washington, D. C. 20545 Harold P. Graves, Esquire Vice President and General Counsel Chairman, Atomic Safety and Consumers Power Company Licensing Appeals Board 212 West Michigan Avenue U. S. Atomic Energy Commission Jackson, Michigan 49201 Washington, D. C. 20545 Robert A. Jablon, Esquire Mr. Abraham Braitaan, Chief James C. Pollock, Escuire Office of Antitrust and Indemnity Spiegel and McDiarmid U. S, Atomic Energy Commission 2600 Virginia Avenue, N.W. Washington, D. C. 20545 Washington, D. C. s20037 j
( Joseph Rutberg, Esquire Benjamin H. Vogler, Esquire Honorable Frank Kelly Attorney General Antitrust Counsel for AEC State of Michigan Regulatory Staff Lansing, Michigan 48913 U. S. Atomic Energy Commission Washington, D. C. 20545 WALLACE E. BRAND Attorney, Antitrust Division Department of Justice Washington, D. C. 20530 E e T e Y e +
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