ML20062G858

Memorandum Opinion in Case of West Tx Util Co & Central Power & Light Co Vs Tx Electric Svc Co & Houston Lighting & Power Co.Judgment for Defendants,Did Not Violate Sherman Act Section 1

ML20062G858
Person / Time
Site:	South Texas
Issue date:	01/30/1979
From:	U.S. DISTRICT COURT, NORTHERN DISTRICT OF TEXAS
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ML19289D203	List: ML19289D202 ML20062G854 ML20062G858
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NUDOCS 7902260587
Download: ML20062G858 (71)

Text

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$.# IN THE UNITED STATES DISmCT COURT F1 LED

. FOR THE NORTERN DISTRICT OF TEXAS JAN 301978 DALLAS DIVISION JOSIPH JtOy p c,g;tK BY .Deputy A&

WEST TEXAS UTILITIES COMPAW )

AND CENTRAL POWER AND LIGHT )

COMPANY )

VS. NO. CA3-76-0633-F

)

TEXAS ELECTRIC SERVICE )

COMPANY AND HOUSTON LICHTING )

& POWER COMPANY )

MEMORANDUM OPINION (s

This case involves the interconnected group of electric utilities companies serving the vast majcrity of the electric 1

consuners in the State of Texas. Plaintiffs, two intrastate Texas electric utility companies which are part of a holding company that also owns oth&r interstate electric utility companies, have sued under $ 1 of the Sher =an Antitrust Act, 15 U.S.C. $ 1, two other Texas intrastate electric utilities with whom plaintiffs are interconnected claiming that the defendants conspired to restrict their transmission of electric power to intrastate coc=erce. This conspiracy allegedly prevented plaintiffs from exchanging power with their interstate holding ce=pany counterparts through the use of defendants' transmission lines, at an esti=ated loss to the holding company of 2.2 billion dollars over the next twenty years. Plaintiffs seek an injunction permanently restraining this alleged conspiracy, restraining any enforce =ent of any written or oral contractual provision prohibiting the flow of electic energy in interstate connerce, and restraining defendants from disconnecting their systems from the plaintiffs' systems. yonc,c3 Defendants have asserted a nu=ber of defenses, including:

(1) the intrastate method of operation is specifically permitted by Federal Power Act 16 U.S.C. $ 824(b); (2) defendants had no antico=petitive intent; (3) any actions by i defendants had no anticompetitive effect upon the plaintiffs 1

1 (4) defendants' were reasonsable (5) defendants acted independently and not in conspiracy. Defendants also question' plaintiffs' -

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motive for filing this suit in a effort to undermine the credibility of the testi=ony presented by the plaintiffs. .

Defendants introduced evidence suggesting that plaintiffs filed this suit to ensure the interstate exchange of power between the me=bers of plaintiffs' holding company. This exchange of power is required by federal lav which permits utility holding company. only if they are integrated syste=s.

.The SEC, charged with enforcing this provision, had permitted the hol. ding company to operate without continuous interstate flow of power until 1974, when various municipal power companies filed a suit with the SIC challenging the holding company status of plaintiffs' holding company. Defendants note that this proceeding is only one of a nu=ber of proceedings instituted by the plaintiffs or which involve similar issues.

These proceedings include:

FPC Docket #E-9558--CSW's request to FPC to order maintenance of interstate operations with ERCOT; PUC Docket #14--Request by Defendants and others to PUC to have PUC order reestablishment of pre-May 4,1976 mode of operation; U.S. District Court, Western District Texas, Austin Division--Suite filed by CPL /WTU objecting to PUC interim order under Docket #14 reestablishing inter-connections in Texas as they were before May 4,~ 1976; SEC Docket #3-4951--Oklahoma cities filed motion with SEC requesting SEC review CSW holding co=pany status; NRC Docket Nos. 50-498-A and 50-499-A--CPL request to NRC to conduct antitrust hearing as part of construction permit proceedings before NRC involving South Texas Nuclear Project; FPC (FERC) Docket Nos. E-9593 and E-9578--CSW's request for joint hearings with PUC, and proceeding to determine if TPL engages in interstate cornerce.

The Court held a seven week non-jury trial commencing

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October 7, 1978. The Court renders the following memorandum decision, supple =ented with additions 1 findings contained in an appendix. l THE PARTIES All of the parties to this proceeding are electric utilities engaged in the generation, transmission, distribution l l

and sale of electric energy. None of the parties' facilities used in the generation, trans=ission, distribution or sale 7

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of electic energy are located outside the State of Texas.

PLAINTI?FS West Texas Utilities Company (kTU) and Central Power &

Light (CPL) are wholly owned subsidiaries of Central and South West Corportion (CSW), a registered public utility holding company under the provisions of the Public Utility Holding Co=pany Act of 1935. 15 U.S.C. $79 ce seq. CSW  !

.. l also owns all of the capital suck of Public Service Co=pany l of Oklahc=a (PS0) and Southwestern Electric Power Co. (SWEPCO),

electric utilities operating in the States of Oklahoma, Arkansas, Louisiana and portions of East Texas.

kiU provides electric service to customers of central West Texas, an area including 167 c w ities, far=s, ranches, and 18 electric cooperatives located in 53 counties. The cities of Abilene and San Angelo are the largest metropolitan centers served by WTU, and the ce=pany serves a total population of approximately 520 000. In 1977 kTU owned and operatad 10 electric generating plants having a total net generating r.apability of 1,054 megawats. That year the kTU system experienced a peak load of 758 megawatts for a reserve of 269 megawatts (see appendix C for a map of the LTU service area).

CPL provides electric service to custc=ers in the Rio Grande Valley and the Gulf, Coast regions of Texas, in an area that includes 212 coc= unities and adjacent and rural areas, seven rural electric cooperatives and two municipal-electric syste=s, in 45 counties. The cities of Corpus Christi, Laredo and Victoria are the largest metropolitan centers served by CPL and the cocpany serves a total population of 1,200,000. In 1977 CPL owned and operated nine electric generating plants having a total net generating capability of 3,044 megawatts. That year the CPL system experienced a peak load of 2,323 megawatts for a reserve of 721 megawatts (see appendix B for map of the CPL service area).

kiU has historically operated its system as two divisions, with the " Northern Division" being interconnected with PSO operating in the State of Oklahe=a and the " Southern Division" O

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interconnected with TESCO and other me=bers of the Texas .

Interconnected Systems (TIS) and the Electric Reliability Council of Texas.(ERCOT)

The TIS is a voluntary membership organization consisting of the =ajor bulk electric power suppliers in Texas, including 2.

DPL, TESCO, TPL, HLP, TU, CPL, Austin, CPS 3, LCRA TMPA.and W N.

The primary purpose of TIS is to insure maxi =um reliable electric service through coordination of planning of operations.

ERCOT was created in July,1970 and is one of nine regional electric reliability councils forming the National Electric Reliability Council ("NERC") . (See Appendix D)

The northern division of W U, through its interconnection with PSO, operated in electric synchronism with PSO and other me=bers of the southwest power pool (SWFP). The two divisions were designed so as to per=it occasienal interchange of power, in part to per=it CSW to satisfy the provisions of the 1935 Holding Company Act.

DEFENDANT 3 Texas Electric Service Co. (TESCO) is a wholly owned subsidiary of Texas Utilities ("TU"), a holding company which also owns all of the capital stock of Texas Power &

Light ("TFL") and 99.67. of the capital stock of Dallas Power

& Light ("DPL"). TESCO provides electric service in North Central and West Texas, including the Cities of Fort Worth, Wichita Falls, Midland, Odessa, Arlington, Grand Prairie and 68 other incorporated municipalities, with a total population of approxi=ately 4,000,000.

TPL, not a party to this suit, provides electric service in portions of 51 counties in North Central and East Texas, including the Cities of Irving, Waco, Tyler, Mesquite, Richardson, Kileen, Te=Iple, She==an, Dennison, Paris, Lufkin, Brownwood and 249 other incorporated municipalities. DPL provides electric service primarily in Dallas County.

TESCO, TPL and DPL are separate corporate entities with N their own officers and boards of diractors. (See appendix 3 for a map of the TESCO. TPL and DPL service terr}. tories, and

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Appendix C for a more accurate depiction.)

. Houston Lighting and Power (HLP) is a wholly owned subsidiary of Houston Industries, Inc. and serves an area of approximately 5,000 square miles in the Texas Gulf Coast region in which it is located Houston, Galveston and 152 smaller cities and towns. In 1977, the peak load for the HLP system was 8,645 megawatts, with a total net generating capacity $f10,170megawattsforareserveof1,525 megawatts.

i (See Appendix 3 for a map of the HLP service territory) .

ELECTRICITY Electricity is consumed the instant it is produced, and electric generators are designed to respond instantaneously to changes on demand. For example, each time an electric applicance is turned on, demand for electricity increases; and, conversely, every time an electric appliance is turned off, demand decreasas. Each minute increase or decrease in demand requires the generators producing the electricity to produce more or less electricity as required.

Once electricity is produced, the producer loses all effective control over it, since elactricity moves by the forces of physics over wires connected from the generator to its point of consumption following the path of least resis-I cance and in total disregard for who owns the path or who produced the electricity. Electricity is unique as a commodity because it cannot be seen, branded, traced, accumulated, stored or confined and is consumed the instant it is produced.

Electric utility companies are also unique in that they must be ready to meet demands for services continuously, although electricity cannot be stored or inventoried. To provide this service, electric utilities must maintain reserve generating capacity in the form of both installed capacity

! and, spinning reserve.

While this reserve can be maintained by each individual

. company, the electric utilities in the United States have .

developed interconnections between each other in order to s.

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, assure greater reliability in the case of sudden emergencies,  ;

to permit the reduction of the total amount of installed reserves accug the interconnected companies, and to permit the exchange of electric power between interconnected or adjacent utilities. Electric interconnections between non-affiliated ce=panies is an accepted industry vide practice, but requires careful study'and evaluation before they are installed. , Interconnections" between non-affiliated electric p utilities give added assurance to both syste=s that an adequate, efficient, and reliable source of electric power will exist, particularly in times of electrical emergency.

When two or more electric generators are electricall; connected with each other, the laws of science require each generator to spin at exactly the sa=e speed or frequency.

Generators so connected are said to be operating in synchronis=

or in parallel with each other. This is true whoever owns the generators and whether the generators are located adjacent to each other or are physically separated by several hundred miles. An important characteristic of electricity is man

, cannot force electriccy to follow any specific path without disconnecting all undesired paths from the generator; thus, when interconnections are closed, electrical disturbances in one generator or transmissien line ipstantaneously 1::r .c upon all interconnected generators. Also, the only effective assurance that power will not flow across Texas state lines, if Texas companies wish to preserve their intrastate status, is to either have no interconnections with any utilities that operate in interstate electrical transmissions (which would include severing ties with Texas electric utilities that transmit or receive power across state lines) or make sure that any points of interconnection between intrastate Texas electric utilities and interstate electric utilities re=ain open, preventing power flow between the two syste=s.

Various types of electric energy exchanges =ay be agreed by interconnected utilities. These exchanges include:

, So (1) " Economy" enertv: Electric energy which one utility sells to another utility at a cost less than the receiving #*

utility can generate its own electricity; -

(2) " Emergency Enertv": E16ctric energy which one utility receives from another when the receiving utility is unable to provide its own system needs due to an unforeseeable failureodequipment, or " outage" on its system; and, (3) " Wheeled Enerty"- Electric energy which one utility t ansmits to another utility (or to itself) over the

( transmission lines of a third, intermediate utility which charges a fee for such services.

INTERCONNECTIONS BETWEEN THE PARTIES Interconnections between electric ut!lities 'in Texas began as early as 1923 with interconnections between TESCO j and WTU. These two companies, along with TEL and DPL, later l l

forr.ed the North Texas Interconnected System (UTIS). '

An emergency interconnection between HLP and Gulf

' States Utilities (GSU) was first made in 1928 (the Huffman tie), but this interconnection did not operate closed as c matter of normal operation until World War II, at which ti=e HLP began operating continuously interconnected with CPL, LCRA, City of Austin, and the CPSB to help eleviate capacity shortages brought on by the war. This action lead to the for=ation of the South Texas Interconnected System (STIS) .

While defendants were indirectly interconnected with each other in the 1940's, there was little, if any, coordination between the systems and STIS and NTIS until the 1960's. On or about August 26, 1935, solely because of the passage of the Federal Power Act, and solely to avoid becoming subject to FPC jurisdiction, WTU opened its interconnections with PSO. Both TESCO and WIU then believed that operation in interstate commerce in a manner which would subject them to the consequences of FPC jurisdiction was not in the best interest of their customers. There is no evidence in the record to suggest that TESCO and ELP reached any agreement or were even interconnected 'n 1935, or that DPL, TPL and

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- APPCCII S The sep, below, shows the general geographical outlines of the electris companies in the State of Texas and ,

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APPENDIX D e The map, below, shows the current interregicnal interconnections in the United States. Each region is connected to at least two other regions and has at least 13 interconnections in the group of interconnected regions (excluding ERCOT and WSCC). .-

ERCOT could only be connected to . 'the Southwest Power Pool (only one region), and this would adversely affect the reliabilit7'

" peninsula of .ERCOT because All of these it would regions makebecome up thean isolated National Energy Reliability Council (hTRC).

The regions are: NPCC (Northeast Power Coordinating Council);

MAAC (Middle Atlantic Area Reliability Council); SERC (_'outheast Reliability Council); ECAR (Eastern Central Area Reliabilky Council); MAIN (Mid-America Interpool Network); SPP (Southwest Power Pool); MARCA (Mid-Continent Reliability Coordination Agreement); ERCOT (Electric , Reliability Council of Texas);

and WSCC (Western Systems Coordinating Council).

The numbers within the circles on the diagram / map indicate the nu=ber of interconnections between the regions. (TESCO #307)

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on occasions, (see Douaherty, supra) to determine which pigeonhole the facts in this case belong) it would be governed by the rule of reason.

Rule of Reason Justice Brandeis articulated the basis for the so-called

" rule of reason" test in the Sherman Act cases in Chicago Board of Trade v. United States, 246 U.S. 231, 238 (1918).

"The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress and even destroy competition. To determine the. question the court must originally consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint and its effect, actual or probable; the history of the restraint, the evil believed to exist, the reason for adopting the particular remedy, the purpose or and sought to be attained, are all relevant facts. This is not because a good intention will save an otherwise objectionable regulation or the reverse; but because knowledge of the intent may help the court to interpret facts and to prevent consequences."

The rule of reason does not permit the court to consider any argument in favor of a challenged restraint that could be labeled reasonable; rather the court must focus on the challenged restraints impact on competitive conditions. National Society of Professional Engineers v. U.S., U.S. (1978). The test prescribed by the Supreme Court in Standard 011 v. United States.

221 U.S.1 (1910) is that 'the challenged contracta 'or acts may be ,

unreasonable if that determination is based either on the nature or the character of the contracts or the surrounding circumstances giving rise to the inference er. presumption that they were intended to, restrain trade and enhance prices. National Society, supra.

Again, the intent or purpose of the contract must be considered when the court decides whether or not a Sherman Act violation has occurred. Scandard 011 at 58; Chicago Board, at 238; National Society. The key inquiry, however, is whether or not the challenged agreement (if one is found) merely regulates and promotes competition or suppresses it. National Society, supra. Absent anticompetitive effect, an unlawful intent .

i will not establish a rule of reason violation, nor will the use of unfair methods of competition. H&B. Equipment Co.Inc.

v. International Harvester, 577 F.2d 239 (5th Cir.1978).

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As of May 4,1976,, defendants had been advised that CSW was going to inte' grate its four subaidiaries to avoid legal .r problems at the SEC. CSW had clearly threatened to take action against defendants to force them to participate in CSW's scheme to integrace its system. When defendants learned of the radial tie into Oklahoma, and the legal actions associated therewith, it is clear they had to either disconnect or surrender to CSW's plan of coercion. .

Defendants have established a long history of avam h = tion of the questice of the benefits of interconnection with SWPP, and they have always concluded that they were better off operating in their intrastate mode. Defendants concluded early in 1976 that the PTI report provided absolutely no basis for a change in their view. The PTI report, which was the only study given defendants before May 4, 1976, does not even address the benefits or costs for non-CSW systa=s resulting from the proposed interconnection. Accordingly, as of May 4,1976, Defendants had no basis upon which to change their prior convicticus that interconnection with SWPP would degrade their reliabiliEy and would impose substantial costs upon their customers with no resultant benefits.

As of the time of this trial, defendants have exhibited willingness to continue their past history of examining the costs and benefits associated with interstate connection with SWPP. Defendants have shown a reasonable belief that interconnection with SWPP would not be economical and would degrade their reliability. Plaintiffs have presented no evidence showing that defendants would benefit from the interconnection, other than some rank speculation by Mr.

Arey about the ability to sell some pcuer to SWPP. Mr. Aray conceded, however, that it is not the normal industry practice to build interconnections to make such opportunity sales.

There is absolutely no evidence suggesting that the companies in SWPP would desire interconnection or would desire to I purchase any such power. The only other potential benefit from interconnection, a reduction in reserve capacity, would not be economically practical according to Dr. Wood.

Plaintiffs themselves conceded that TIS is one of the most reliable interconnected systema in the United States. '

In addition, plaintiffs' expert, Mr. Aray, admitted that TIS was a reliable system and that there was no need for interconnection with SWPP from a reliability standpoint. Defendants have shown that TIS has an outstanding record of success in responding to emergencies, and they believe that their method of operation accounts for the high reliability of TIS. Interconnection with SWPP would necessarily alter this method of operation and thus lead to degradation in reliability.

Defendants also believe that interconnection with SWFP would greatly complicate manage =ent and coc=unication proble=s within the interconnected group. Mr. Aray admitted that the most recent blackout of New York City was attributable in part to such coc=unication proble=s. None of the volusinous reliability studies conducted by plaintiffs addressed these concerns voiced by the defendants.

As of May 4, 1976, defendants had reason to believe that interconnection with SWPP would degrade their reliability and increase their cost of operation with no significant offsetting benefits. Plaintiffs had presented them with absolutely no evidence to the contrary as of that date.

Notwithstanding this fact, HLP was still evaluating the question of whether it would participate in an interconnection with TIS and SWPP. Thus, when HLP learned of the midnight wiring, it elected to disconnect in order to preserve for itself the right to make unilateral decisions as to the desirability of such innerconnections. Both defendants were concerned that the FPC might take steps to order the innerconnection of TIS and SWPP over the objection of defendants in light of

- the long history of efforts by the FPC to bring about such an interconnection despite the opposition of <tafendants and the other members of TIS. Defendants believe they are pursuing the best course of action for their custoners and had no anticompetitive intent or purpose in disconnecting l from plaintiffs. I also believe from the testimony presented at the trial that defendants are pursuing the best' course of

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i There is absolutely no evidence of any prior agreement by' defendants to disconnect from any member of TIS which commenced interstate operations. Mr. Jordan, president and chief executive officer of HLP, testified that as of May- 4, 1976, he had never even talked with anyone from TU or its subsidiaries about the issue of intrastate operations. In fact, if there had been a prior agreement to disconnect between de'fendants, there would have been no need for them to have disconnected from each other. The absence of any preexisting agreement to disconnect is further confirmed by the extended negotiations that were required before defendants restored their interconnections on May 10, 1976.

The evidence clearly establishes that at the time TIS was formed, all of its me=bers were co=mitted to the proposition that it was in their mutual best interest to operate on an intrastate basis. Nonetheless, if any me=bar of TIS chose to withdraw from TIS, it was free to do so. The other ,

me=bers were to be given notice of such a decision and were to be given an opportunity to decide for themselves whether they would go interstate as well or re=ain intrastate.

Given the defendants reasonable opposition to interconnection with S'JPP and threats by CSW to force both of them into such an interconnection, it is not surprising that they both elected to disconnect from plaintiffs on May 4, 1976.

Defendants acted unilaterally and took the only course of action open to them if they were to avoid the adverse effects of interstate operations. .

I think it is clear from the evidence that there was no anticonpetitive effect by the alleged actions of the defendants and therefore no violation of $ 1. In addition, again I must look to the competition between plaintiffs and defendants, and again, for the reasons stated before, I find it non-existent or de minimis.

Finally, considering the purpose of defendants to avoid FPC jurisdiction and the reason for adopting the intrastate mot a 'to avoid FPC jurisdiction, as well as my belief that the effect of defendants' actions on the plaintiffs is

highly speculative and questionable I believe plaintiffs have failed to show a violation of $ 1 of the Sherman Act  :

under the rule of reason. For the reasons set forth above, and in the appendix, I find no violation of $ 1 of the Sher =an Act and I deny plaintiffs' request for injunctive relief.

ELP's Counterclaim HT.P, CPL, City of Austin and the City of San Antonio are all participants in the construction of a nuclear power and generation facility known as the South Texas Project.

The South Texas Project (STP) involves the construction and operation of two 1250 megawatt nuclear generating stations in Matagorda County, Texas. The participants all signed a document, executed as of July 1st, 1973, known as the participation agreement, which HLP alleges that CPL breached. The esti=ated cost of the project exceeds one billion dollars.

HLP alleges that CPL, under pre,ssure from CSW, breached

( $ 8.2 of the South Texas Participation Agreement, which provides :

"8.2. Each participant sha11' design, construct, own, operate and maintain the transmission facilities necessary to connect its system to the South Texas project switch yard, with the objective of permitting each participant to transmit under normal operating conditions its generation entitle =ent share from units of the South Texas Project to assist in a manner which will not unreasonably affect the

. operation of electric systems of the other parti-cipants or the interconnected system of others. .."

(HLP Ex. (208)

CPL's participation in the May 4, 1976 interstate interconnection, plus the August 27, 1976 co==encement of CPL /WTU operation in synchronism with the Southwest Power Pool allegedly created a situation in which the South Texas project could not be planned, constructed or operated as originally conte = plated. If CPL establishes interstate interconnections and/or operates in synchronism with the Southwest Power' Pool, ELP alleges in its complaint that it would incur enormous expense in redesigning and reconstructing l l

its entire transmission system in order to operate in a i synchronous AC made or, by the construction of a direct current (DC) interconnect which would allow any entity

operating in synchronis: with the' Southwest Power Pool to

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remove its power entitlement frc= the South Texas Project by direct rather than alternating current. These costs allegedly amount to c"er one billion dollars sud HLP asks for recovery of this sum plus entry of a permanent injunction connanding CPL, L'IU and CSW to refrain from taking any action which would require a'n y participant in the South Texas Proie-t to tranc=it its power and entitlement under abnor=al operating conditions in a manner which would unreasonably affect the operation of the electric systems of the various participants in the South Texas Project or the other interconnected systems of others.

At the ti=e the STP participation agreement was signed, it was not contemplated that any participant in STP would unilaterally co ence synchronous operation with syste=s outside of the TIS while re=aining a member of TIS. In August, 1976, CPL and ETU co==enced synchronous operation with Sk?P, and on Dece=ber 14, f

1976, CSW advised the SEC that it was going to make per=anent the synchronous interconnection of its four subsidiaries. Evidence presented in this record indicates that this synchronous operation created substantial operating proble=> for plaintiffs until it

.was terminated by CSW in January,1977, following the filing of HLP's counterclaim. The evidence is undisputed that had CPL continued to operate in this manner, both CPL and ELP could not have both obtained their power from STP absent a physical separation of the two plants with the installation of DC transmission equipment, t neither of which have been planned for at this time. The testimony is also undisputed that had CSW and CFL infor=ed HLP that it

, wished to operate in interstate coc=erce when the project was originally conceived, it would have been possible to design the STP in a different manner so that CPL and ELP/ TIS could both

, get power from STP without there being a connection between the two systems. l While CSW is now constrained by the terms of the orders of the Texas Public Utility Co= mission, CSW is nonetheless cc:=itted to the establishment of snychronous ties between its four companies, notwithstanding the fact that CFL is still participating in STP.

This problem is compounded by the fact that CFL and WTU are re-

/I that they will be operating on a synchronous basis with their l r i affiliates in SWPP. CSW has demonstrated a past history of (

i causing precipitate operating changes among its subsidiaries l despite tas oroblems created by such changes and without any prior study of the anticipated effect.

ELP has also shown that if CSW was able, to force its mode.4 pl'an of operation on the STP participants, and the systems with whom they are interconnected, this mode of operation will unreasonably interfere with the operation of its electric system. First, the interconnectio' may'n require an upgrading of existing transmission lines because of the additional flows that will come into HLP's system in the event of an emergency. Second, to the extent existing lines are adequate for the power flows under mode 4, the capacity of these lines will be used.by CSW for their proposed transfers and as a backup in emergencies within the proposed CSW

[ powerpool. The net effect, therefore, is to usa capacity planned by HLP and other systems for their use in transmitting power from STP and other plants on their systems. Since the TIS transmission system is not presently designed to act in synchronism with SWPP, it could not have been conte = plated that CPL would unilaterally bring about the kind of drastic operating changes in TIS that necessarily would follow from any form of synchronous interconnection with SWPP as long as CPL remained a member of STP. This is a clear cut example of action by one participant which would interfere with the electric systems of the other participants in the systa=s with which they are presently connected.

I find that CSW and CPL's c* t=ent to the establishment of synchronous operation between WTU, CPL, PSO and SWEP violates

$8.2 of the South Texas Participation Agreement because that cocznitment is an " objective" which will " unreasonably affect the operation of electric systems of other participants", specifically HLP. While CPL /CSU's operation in synchronism will not affect the participant's ability to get electricity until the STP actually begins operation (it is still under construction), ELP need not wait for fission before seeking an injunction prohibiting h

l violation of f 8.2. I find that under the evidence in this case plaintiff CPL's conduct threatens a violation of Section -

8.2 of the STP agreement and CPL is hereby permanently enjoined from permitting power it receives from STP to enter inter-state ce==erce as long as CPL remains a participant in the STP Agreement and as long as 5 8.2 of that Agreement remains in '

force. ,

Costs and Attorneys Fees While both sides have vigorously contended that they are f

protecting the public interest by atte=pting to preserve or eliminate the current intrastate electric utility system in Texas, both sides in this proceeding have ignored the i= pact on the public of the staggering costs and attorneys fees egended by the parties in this case and in the proceedings before the SIC, FPC, FERC, PUC, NRC, and other forums. It would be r'aive to assume that the companies will absorb these expenses by way of reductions of earned surplus; it is more reasonable to assume that the,se expenses will be passed along to the public in the rate structure.

I have no control over whether or not the costs and attorneys fees in this case, or any of the other proceedings involving these parties, can be passed along in the form of increased rates to the public. While the motive of CSW and the plaintiffs in bringing this antitrust action is irrelevant (except as I have otherwise noted) to a determination on the merits of plaintiffs' antitrust claims, I think it is very relevant to the question of whether or rat the public should t.: forced to 3

pay increased rates to cover the expenses of this action.

CSW's apparent primary purpose for filing this lawsuit was to 4

preserve its holding company sL cus. I do not feel that the public should have to pay any of the expenses incurred in the i

attempt to preserve CSW as a holding company. I hope that the I

l PUC seriously cor.siders denying the inclusion of these expenses O

I l

l 1

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, , Tootnotes ~

1.

Definition of carms used in this opinien:

bulk transmission system higher voltage and higher capacity lines cying together power plants and serving major loads going to interconnections closed connection: switch is closed and power can flow over the interconnection between the two systems distribution line: serves local loads generation: the production of electricity intra s ta te : electric utilities operating in such a manner that electric energy does not cross state lines interstate: electric utilities operating in such a manner that electric energy is either transmitted or received across state lines open interconnection: switch at the interconnection is open with no power or energy being able to flow over the interconnection parallel operation: virtually the same as synchronous operation redisi line: " single feed"--one electric line to a town; two transmission lines to a town would be " dual feed" f

reserve: two types of electric energy reserve spinning reserve--reserve that a utility has on line at any time copseity reserve--total generation of the capacity of the utility system less expected peak demand (the maxhnen amount of energy demand on the system during the year),or reserve above the pe'ak demand of generation synchronous overstion: means two or more electric utilities systa=s interconnected with the generators operating in synchronism with each other transmission line: serves bulk power supply 2

l Definitions of abbreviations used in this opinion:

l l

"CSk'": Central and South West Corporation

" CPL": Centr'a l Power and Light Company,

'VrU": West Texas Utilities Company "PS0": Public Serve Company of Oklahoma "Sb'EPCO" or "Sb'EP": Sot:thwestern Electric Power Con:pany.

"TU": Texas Utilities Company "DFL": Dallas Power and Light Company l "TESC0": Texas Electric Service Company l

"TFL": Texas Power and Light Company 1

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"ItLP": Houston Lighting and Power Company "TI S  : Texas Interconnected Systems

~"ERCOT": Electric Reliability Council of Texas "S'a'PP" or "SPP": Southwest Power Pool "FPC": Federal Power Consnission "FERC": Federal Energy Regulatory Consnission "PUC": Texas Public Utility Commission "5EC": Securities and Exchange Conshission "CPSB": City Public Service Board of San Anconio, Texas

" AUSTIN": City of Austin, Texas "LCRA": Lower Colorado River Authority "TMPAU: Texas li2nicipal Power Agency 3

The PUC has deferred a ruling on issues similar to the issues I.. presented in this case pending a ruling by chis court on the merits of this suit. I therefore think it appropriate to coc=ent on these attorneys fees, even though I cannot award attorneys fees, since the PUC will be relying on this court's view of the evidence.

4 This findi.ig is limited only to this discussion concerning the propriety of passing through these legal expenses to the public in the rate structure.

5 The Defendants r.sy have a valid argu=ent that they should be able to pass through their costs to the public because they

(^ did not institute this litigation', and were forced to defend it.

9 9

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the term of the witnesses) ERCOT with centralized dispatch for comparative purposes, although that could have easily e been done. The PTI report did not include costs for wheeling, line losses or off-system economy sales (except those PSO had under contract), even though PSO has historically engaged in massive off-system opportunity sales. None of the defendants were ever. offered by the plaintiffs any co=pensation for the cost of installation of Mode 4. The PTI transmission system was a broad brush treatment and no reliability study was conducted. "It is planned to c.onduct a reliability study in order to consider the interrelation of interconnection capability, generating unit size and type with the reserve require =ents necessary to hold a given, objoetive standard of service reliability calculated using probability methods."

PTI at 8.

The econo =ic benefits shown on the study supporting -he plan submitted to the SEC are clearly speculative in nature and provide no basis for a finding of competitive injury:

(a) There are no savings to CSW from Mode 4 until 1986; (b) 50*. of the savings co=e in the last three years of the 20 year study and there is no provision for sites or fuel for any of the plants planned for any of those three years; (c) After 1986,12 of the 22 new power plants to be built by CSW are lignite-fuel plants for which CSW has no assured supply of fuel; (d) 907. of the alleged savings ce=e from differences in fuel costs. The fuel costs used in these studies are very speculative, and in fact, certain of the fuel cost assu=ption changed drastically in the short time between preparation of the PTI report and the SEC study; (e) If Mode 4 is not i=plemented by'1982, the studies would have to be reevaluated and there are numerous regulatory hurdles that CSW must clear before it can begin implementation of Mode 4 Dr. Wood ad=itted that his cost calculations should but did not, include ' costs that would be i= posed on d'efendants

, - x _

and other members of TIS as a result of the proposed power r transfers between CSW subsidiaries. The omission of these records has been justified by CSW's position that the interconnection between CPL and SWEPCO would serve as a " contract path" (a term that no expert in the electric utilities industry had heard before it was proposed as a conceptual idea by the plaintiffs in this and related litigation) the coec of which would supposedly approximate the cost of wheeling power /

threugh TIS. Plaintiffa' transmission design expert, Mr.

Aray, admitted that notwithr;:anding tha existence of this

" contract path" up to 707. of the CSW transfers would still -

go over the transmission lines of defendants and other me=bers of TIS. The evidence shows that the " contract pach" was not in any way designed to compensate defendants. In (

his deposition, Mr. Arey admitted that he was told to includa

("

the direct tie between CPL and SWEPCO in his transmission V design becauss of CSW's legal problems at the SEC. Mr. Arey also admitted that CSW would be using the TIS transmission system and that the ability to use'the TIS system represented the difference in cost to CSW between Mode 4 and Mode 2.

Nonetheless, plaintiffs have never offered to pay defendants for either the use of their systems or the cost imposed on them, but have in fact insisted that defendants should bear part of the costs of the interconnections.

Dr. Wood admitted that either Mode 2 or Mode 4 would achieve integration of CSW and that Mode 4 would save only 1.1% to 1.6% more than Mode 2 for all four subsidiaries combined, over a 20 year period. This difference is withcut the penalty which should be charged against Mode 4 for 4

wheeling and internal costs that would be imposed on the non-CSW members of TIS. ~Dr. Wood also admitted that he was not able to make any allocation of the Mode 4 savings among '

the four CSW subsidiaries. He further ad:nitted that the actual allocation of savings would ultimately depend on the outcome of regulatory hearings in the States of Texas, I I

Oklahoma, Arkansas and Louisiana. +

N s 4 N.

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q I

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[i

> - - And yet, this is the arcdy, with all of its weaknesses

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(including the fact that the PTI study became outmoded to some extent with the inclusion in the study of generation based primarily on coal resources which had not been contracted for), that the CSW Board used to basa its decision to enter interstate operations and upon which it based its conclusion that an antitutst case should be filed in this court because plaintiffs were being boycotted by defendants, and this would have a terrible impact upon the price of plaint.iffs' electricity in the future.

I recognize, as I think counsel for plaintiffs pointed out during the testimony, that just because the initial figures were wrong and that new, more accurate figures are provided, that that fact alone does not negate the existence of an antitrust violation. But in this case I think it clearly goes to the credibility of the plaintiffs' case--an apparently hasty decision.was made on incomplete data, which

i. included so=a brocd brush studies of transmission, and no reliability studies. If plaintiffs ure seriously concernet' about procuring the alleged savings and pursuing the most economical mode for CSW, their actions would seem, at best, -

.f.

hasty, and the fact : hat- those decisions were hasty and were apparently primarily motivated by the SEC proceedings and i

preservation of the holding company, rather than by concern over antitrust violations, makes me seriously question the correctness of the PTI study and all studies thereaf ter as they relate to this' litigation. That skepticism is hightened by my recollection of the testi=ony, and review of it over

( the past few weeks, because serious holes and erroneous assumptions were built into the various studies and restudies of the economice of the situatien. ,

Another of plaintiffs' witnesses, Mr. Bruggeman, attempted

( ,

to update Dr. V~-d's work in studies completed after the a r

}: trial of this lawsuit had ba r n. These CSW plans, proposed without Dr. Wood's assistance, projected for a twenty year

/ period, with losses for the first ten years of the study.

', I .

There was, ni evidence that CSW had any fuel resources for 4

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generators for the second ten years of the study period, and there was no competent evidence upon which Mr. Bruggeman could ,

rely in projecting the fuel cost for plants during the second half of the study period. Coal contracts had not been secured, lignite leases not developed, nor plant locations determined. -

These studies, based almost entirely on hearsay, were not even admitted in evidence for the truth of the information they contain. Nevertheless, in reliance on its studies, Mr.

Bruggeman soaght to make an arbitrary allocation of the savings to show the possibility that plaintiffs would share in them, aven though he was not qualified as an expert on allocation of savings within a power pool. That allocation depends on future decisions by regulatory authorities, so there is no basis for determination on this record that plaintiffs will share in any portion of the savings attributable to Mode 4 Any savings projected without any competent

(

evidence with respect to cost are purely conjectural and speculative.

CSiJ bas apparently decided to implement the generation plans pro osed by Mr. Bruggeman's study, [R.2332-33(Bruggeman)],

and

• as apparently abandoned the PTI and other generation plans. (R.2404(Brugge=an)]. Mr. Brugge=an asse= bled new generatien plant which were completed after two weeks of trial. I might add, in passing, that I had no real idea, most of the time, what Mr. Brugge=an was talking about, and after reresding his testimony, I still find it very confusing l

and not any more enlightening. I think the plaintiffs had a duty to present the evidence to the court in a comprehensible form--I don't know too many judges that are electrical engineers or system planners, and when it came to Mr. Bruggeman, the plaintiffs failed in that respect.

I found Mr. Scarth's testimony the most enlightening of all, and, despite plaintiffs' cross examination, I believe ,

his exhibits and testimony about Bruggeman's figsras showing alleged savings to CSiJ, and not Bruggeman's testimony, at least what I understood BrugFsman to say.

7 The Bruggeman studies which were completed after this .

trial began were illogical and biased in favor of Mode 4 as e compared with Mode 13:

(a) Bruggeman's Mode 13 genee tion plan assumes three more expensive 400 megawatt coal units at Lake Diversion and two less expensive 640 megawatt coal units at Lake Diversion in, Mode Tour. The same arsumptier in both modes reduces the alleged savings of Mode 4 over Mode 13:

(b) Bruggeman's studles do not include off-system opportunity sales even though PSO has historically had extensive off-system opportunity sales. Off-system sales reduced the alleged savings of Mode 4 over Mode 13; (c) Bruggeman's studies do not include any charge for wheeling even though such costs will be required for the massive amounts of power proposed to move over transmission lines of the TU companies and other non-CSW companies. The inclusion for wheeling costs reduces the alleged savings of Mode 4 over Mode 13; (d) Brugge=an's studies do not includs a charge for line losses or other essential transmission lines for non-CSW companies. The inclusion of costs for line losses and minimum additional transmission lines just for the TU system reduces the savings of Mode 4 over Mode 13.

Even using the same assumptions and data, Mode 13 results in a savings not a loss as compared to Mode 4 if only these reasonable changes and costs are included.

The conclusions and opinions of Mr. Bruggeman were based upon fuel costs and other estimates which are not in evidence and upon which there was no evidentiary predicate laid.

Mr. Bruggeman was not qualified to opine as a fuel expert. Consequently, those conclusions were admitted into evidence only for the fact that he made such conclusions and not to the truth thereof.

The opinions of Dr. Venders,concerning the nature and extent of competition among electric utilities in Texas is based entirely upon the conclusions of Mr. Bruggeman (see R.2702(Wenders)] and upon the realization of not savings in 1

0

_ ._ =.

, l l

58 a Mode 4 configuration. Since Mr. Brugge M 's conclusions s

have not been established by competent evidence for the truth thereof, the opinions of Dr. Wenders do not support their conclusions. Indeed, the implementation of Mode 4 is likely to result in substantial not cost rather than any savings. ,

Cascading blackouts can and do occur on electric systems at a time when the systems on " paper" appear reliable. The 3

northeast blackout is an exa=ple of this. Electric systems in Texas form a peninsula and are capable of being interconnected with just one other Reliability Council. Hu=an error impacts the reliability of an electric system, and the larger the interconnected system becomes, the mera ce= plicated co - ication among system members and the chance for hu=an error creating a cascading type blackout is greater. From the testi=eny, the plaintiffs have not established that the interconnection of TIS /ERCOT with SWFP would be as reliable as the current intrastate operation, or even a reliable network.

Even assuming that plaintif had proved a violation of the antitrust laws by defendants, there is ne evidence that they are threatened with harm as a result of such violation.

Plaintiffs parent holding company has not yet obtained approval from the SEC which would result in a synchronous, interstate mode of operation for the four CSW subsidiaries.

In addition, plaintiffs have not even submitted plans for interstate operations to the Texas PUC for approval. Under the latest Mode 4 plans presented by CSV at the SEC, no savings would be realized by plaintiffs until at least 1986, and under the evidence in the record, savings that far in the future are speculative at best. Apart from Mode 4, plaintiffs have th's option of interconnecting with SWFP in &

Mode 2 configuration which defendants do not oppose. Under these circu= stances, plaintiffs have failed to prove threatened loss or da= age sufficient to support their claim for permanent and injunctive relief.

To s m rize. "(r)ecovery and da= ages under the antitrust lat is (sic) available to those who have been directiv injured i )

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seemingly vertical reistionship may be deemed capable o* horizontal restraints if they are actual or potential competitors. Dougherty, supra.

Horizontal agreements are those in which the participants in the normal course of things will be ccepeting among themselves. 388 U.S. 352, 359. As stated in United States

v. Topeo Associates, Inc. 405 U.S. 596 (1972) it is a per se violation of 5 1 of the Sherman Act when there is an.agres=ent

,m 'botween competitors of the same level of the market structure to allocate territories in order to minimize coepetition, or, a horizontal restraint.

Again, I must consider whether or not plaintifs and defendants are competitors, and I reach the sa=e conclusion:

for purposes of 5 1, and horizontal restraints, they are not, and therefore the per se approach should not apply, but rather the rule of reason analysis. In addition, I cannot see any way that the plaintiffs can argue that the defendants have allocated territories in order to minimize competition.

The PUC in Texas allocates geographic territories for the electrical market in Texas, and while defendants have some influence in the PUC as do the plaintiffs, they have no open control over those decisions. For this reason also, I do not see how this is a horizontal restraint case.

Plaintiffs have cited a recent Fifth Circuit case involving electric utilities as authority for per se treat =ent. Gainesville Utilities Deet, of Florida Power & Lieht Co. , 573 F.2d 292 (5th Cir. 1978). In C'ainesville, unlike the factual circu= stances in this case, the plaintiffs were able to show opportunities for one utility to " invade" the service territory of another utility, a history of consultation between two neighboring utilities and the allocation of new wholesale customers between utilities as requests for service arose. In Gainesville there was an agree =ent to allocate custcmers which was obviously anticompetitive in effect and intent; no similar agreement exists in this case.

If this is a vertical restraint case, and I am not sure that it is,-(the Fifth Circuit _has,found it difficulti ; Ma

r by 'the lessening of competition and is withheld from th'ose who o

seek the windfall of treble m ges because of incidental harm." I.arry R. George Sales Co. v. Cool Attic Corp. ,

F.2d _(5tn Cir.1978), p.1993 at 1998 Ad. Sheet (erphasis addad) (Robinson-Patman Act case). Here there is only an inci- _

dental,' if any, effect on prices, and plaintiffs are not entitled to a windfall of fnjunctive relief because of incidental harm.

Vertical and Horizontal Restraints When this casa was orignal17 filed in 1976, certain territorial restri.:tions were per se illegal under the Sherman Act. United States v. Arnold. Schwinn & Co., 388 U.S. 365 (1967). "Under the Sherman Act it is unreasonable without more for a manufacturer to restrict and confine areas for persons with whom an article may be traded after' the manufacturer has parted with derdnica over it, " Schwinn at 379, but when a " manufacturer retains title, dominion and

(~ risk with respect to the product and the position and function of the dealer in question are in fact indistinguishable from those of an agent or salesman of the manufacturer" then the rule of reason governs. Schwinn at 380. Per se rule applied in Schwinn to territorial restriction was overruled in Continental T*.' Inc. vs. CTE S-lvania, 433 U.S.36 (1977),

although the Court left the door slightly ajar for applying per se illegality to particular applications of varnical restrictions if they were based upon demonstrable economic effect, rather than Schwinn's formalistic line drawing.

Continental at 58.

"(T)here are certain agreements or practices which because of their prejudicious effect on competition and lack of any redeeming virtv.e are conclusively presumed to be unreasonable and therefore illegal with ela5 crate inq ry as to the precise harm the have cauwd or the usiness excuse for their use.g Northern Pacific Railway v. U.S., 356 U.S. 1, 5 (1958).

Horizontal markets divisions, as opposed to the vertical restrictions discussed in Schwinn, and Continental are per se illegal under the Sherman Act. Timken Roller Bearing Co.

vs . U. S . , 341 U. S . 593 (1951) : Doughertv v. Centinental 011 Co., 579 F.2d 954 (5th Cir.1978), and entities in a l

e

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and those incurred by the parties in the related SEC, NRC, PUC, 5

etc. hearings, in any rete request by these companies.

It is so ordered.

. n- .

UNITED STATES DISTRICI JUDGE Date N.' M*]y

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APPENDII A ADDITICHAL FINDINGS OF FACT AND CONCLUSIONS OF LAW .

Findinits of Tact

1. als court specifically finds that the statements at trial by executives of TU TESCO, DPL and ELP that they have not agreed with each other to refuse interconnections which might result in FPC jurisdiction are credible in light of all the facts in the case, and are entitled to great weight.

2. The South Texas Project (STP) nuclear enerating station,;a project co-owned by HLP, CPL, City o Austin and City of San Antonio, was planned and is currently being constructed on the understanding between the co-owners that participation in the ownership of the project was canditioned upon each participant confining its operations (or ac least tho' transmission of the electricity from STP) to the intrastate transmission of electricity, solely within the State of Tex.as .

3. None of the parties voiced objection to this procedure (see Finding of Fact #2) at the time construction was planned or begun on the STP: if they had, the project could have been designed so that those parties wishing to remain in intrastate coccerce could do so and still get their power from STP, while those insisting upon interstate operation could receive their power.

4. The generation facilities of the STP cannot, at *.he current stage of construction, be converted to produce two types.of electricity (intrastate and interstate); any regulation of the character of the electricity must occur when the g- power leaves the STP.

5. There is no competition a=eng electric utilities in Texas or only de mini =us competition to attract industrial customers to locate plants or facilities in Texas electric utilities' service areas.

6. There is no competition among electric utilities in Texas or only de minimus competition to attract wholesale sales and purchases.

7. If plaintiffs are unable to retain their interconnections

.. with defendants once plaintiffs begin to engage in completely interconnected. centrally dispatched operation with PSO and SWEP, plaintiffs might incur increased fuel costs but the evidence on this point is highly speculative, as is the amount of other increased costs plaintiffs might incur.

8. CPL has threatened breach of the STP and unless restrained will do'so when the project is complete by con-necting in interstate cornerce while continuing to receive power from the STP, thus putting all of the participants in the STP involuntarily into interstate commerce.

9. Plaintiffs have failed to prove facts which could be the basis of an injunction against the defendants.

10. There is no substantial evidence of competition between defendants and plaintiffs in the following categories of so-called markets: franchise competition, interfuel competition, 61

l self-generation competition, wholesale cocpetition, retail competition or retail competition for new industrial customers.

11. Plaintiffs failed to define the size, scope and geogryphic.~

Ifmits of any of their alleged relevant markets.

12. Plaintiffs failed to prove or even assert that Defendants were motivated by anticompetitive intent or purpose in deciding to disconnect from Pisintiffs on May 4,1976 and thereby peeserve the right to decide for the=selves whether to concence interstate operations.

13. , Plaintiffs failed to prove injury to competition as opposed to the highly speculative possibility of injury to themselves as " competitors" .

,3 14. In ter=s of threatened future harm, Pla'.ntiffs' economic studies failed to de=enstrate any significent competitive injury resulting from Defendants' slleged anti-trust violations.

15. Since August 26, 1935 TESCO, TPL, DPL, ELP and others have independently pursued a policy of remaining in intrastate concerce, not subject to FPC control.

16. WrU's provision of electric service to custo=ers located in the towns of Davidson, Frederick and Tipton, Cklahoma on May 4,1976 and thereafter affected the reliability that HLP, TPL, TESCO and DPL were able to provide to their respective customers.

17. There is no evidence that the disconnection by each of

( tha TU companies was the product of an agree =ent to disconnect.

Indeed, all the evidence is that they did not have an agree = ant to disconnect in the event of interstate operation by any system connected with them.

18. The TC cocpanies, while not severing connections with each other on May 4,1976, did not do so in reliance upon any mutual understanding or agreement that each of the TU cou:panies would operate only in intrastate concerce.

19. The electric utility industry in the United States currently consists of three seperate interconnected groups:

ERCOT, with a peak lead of approxi=stely 30,000 megawattes; the utilities generally west of the Rocky Mountains, with a peak load of approximately 70,000 megawatts and the utilities other than ERCOT members, generally east of the Rocky Mountains with a peak lead of approximately 300,000 cesswatts.

20. Any conclusion of law which is deemed to be a finding of fact is hereby adopted as such.

Conclusions of Law

1. This court has jurisdiction of the parties and of the subject matter of this suit.

2. Although Plaintiffs and Defendants are noc " jurisdictional" (being intrastate utilities) sud not subject to TPC/TERC regulation, the Sher =an Act $1 " jurisdiction" extends to conduct which has or could likely have a substantial effect on interstate con =erce, Fe=inist Womens Health Center v. mhan=ad, 586 F.2d 530,539 (5th Cir.1978), and for purposes of jurisdiction the actions of s

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Defendants could have a substantial effect on interstate -

commerce.

~

3. Venue is proper in this district. ,

4. The determination of TESCO and EP to avoid the consequences of federsi regulation does not constitute an unreasonable restraint of trade or an unlawful boycott in violation of the Sherman Act.

3. TESCO and EP- each have a right to restrict their operations to the State of Texas where they reasonably and in scod faith believe that such operation is in the best interests of TESCO or EP and in the best interests of their customars.

6. The interconnection agreements between TESCO and WTU do not constitute an unlawful conspiracy, combination or agreement in restraint of trade or an unlawful boycott in violation of the Sher =an Act.

7. The intsrconnection agreement between TFL and EP dces not constitute an unlawful conspiracy, combination or agreement in restraint of trade or an unlawful boycott in violation of the Sherman Act.

8. The TIS agreement and the ERCOT agreement do not constitute ,

an unlawful conspiracy, combination or agreement in restraint of trade or an unlawful boycott in violation of the Sher =an 2 Act.

I

9. The existence of cooperation and coordination among the electric utility systems of TIS and ERCOT operating interconnected and in electrical synchronism with each other solely within the state of Texas does not constitute an unlawful conspiracy, combination or agreement in restraint cf trade in violation of the Sherman Act.

10. TPL, DPL and TESCO did not conspire in any manner to violate the antitzust laws, specifically $1 of the Sherman Act.

11. TPL, DFL, and TESCO did not violate the Sherman Act $1 den they disconnected from the Plaintiffs following the May 4, 1976 midnight wiring.-

12. Defendants' actions on May 4,1976 and following were reasonable den viewed in light of the intent and motivation of Plaintiffs' parent corporation, the lack of any business purpose for the midnight wiring, the threats of force previously and consistently made by CSW and the Defendants' desire to remain in intrastate conuserce, or to at least make a voluntary decision to enter interstate commerce.

13. The Public Utility ' nistory Policies Act of 1978

• sdda a new Section 210 to the Federal Power Act dich gives FERC the authority to order an otherwise intrastate electric utility to interconnect with another electric utility dere such interconnection with another electric utility is in the l public interest and dere the interconnection would encourage the overall conservation of energy or capital, optimize the l

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overall efficiency of use of facilities and resources, or improve the reliability of any electric utility.

14 It would not be in the public interest to force the Defendants to interconnect in interstate conumerce. *

15. It would not encourage the overall cceservation of energy or capital to force the Defendants to interconnect in interstate conumerce.

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16. It would not optimize the overall efficiency of the use of facilities and resources to force the Defendants to interconnect in interstate consnerce.

17. It would not improve the reliability of any electric utility to force the Defendants to interconnect in interstate a consnerce, and would, in fact, decrease the reliability of the Defendants.

18. Any contractual prohibitions against interstate sales contained in the contracts made between the parties regarding, for example, sales of esonomy power, etc., are not void or voidable, and are not per se or unreasonable violations of the Sherman Antitrust Act 51; they are reasonable restrictions.

19. The actions of the Defendants do not run counter to the public policy declared in the Sherman and Clayton Acts.

m 20. The actions of the Defendants do not constitute

! unfair methods of competition.

21. The intrastate agreements and Defendants' actions do not foreclose a significant amount of potential competition. ~

22. The intrastate agreements and Defendants' actions do not create or maintain a situation inconsistent with the antitrust laws and do not significantly affect the parties' activities under the antitrust laws.

23. Defendants' attempts to petition the PUC, FPC, this court and other governmental bodies to preserve the current intrastate status of Defendants were and are genuine atte= pts to influence public officials to take governiaental action and were not merely a sham to cover up an attempt to directly interfere with the business relationships of Plaintiffs.

24. Defendants' attempts to petition the PUC, TPC, this court and other governmental bodies to preserve the current intrastate status of Defendants were and are protected by the First Amendment. California Motor Transport Co.' v. Truckinit Unlimited, 404 U.S. 508 (1972); United Mine Workers v. Pennington, 381 U.S. 657 (1965); Eastern Railroad President's Conference v.

Noerr Motor Freight Inc. , 365 U.S.127 (1961).

25. There is no evidence that Defendants' petitioning activities 64 s.

(

,3 .-

in requesting the PCC, FPC, this court and other governmentaY bodies to preserve the current intrastate status of the Defendants was a " sham".

26. blaintiffs are not entitled to injunctive relief undar

. $16 of the Clayton Act for the purpose of permanently restriihing the Defendants from enforcing any written or oral contracts &1 provision prohibiting the flow of electricity / electric energy in interstate commerce, and are not entitled to injunctive relief permanently restraining Defendants from disconnecting their systems from, or refusing to inter-connect their systems with' , those of Plaintiffs. ,

27. . CPL has anticipatorily breached and CSW has caused CPL to anticipatorily breach the STP Agreement.

28. CFL has not yet breached the STP Agreement because the

,s Project is not complace and no power is, currently being genersted or transmitted from that facility.

21, CFL is hereby permanently restrained from permitting power it receives from the STP to enter interstate commerce as long as CPL remains a participant in the STP agreement and as long as that Agreement remains in force.

30. Plaintiffs have not ' established irreparable injury

. to competition, an unlawful restraint of trade, a conspiracy in restraint of trade or an unlawful boycott at any time from 1935 to the present and are therefore not entitled to injunctive relief.

31. Any finding of fact which is deemed to be a conclusion .

of law is hereby adopted as such.

l 65 i

v I

l i

l to the competitive market in an antitrust case. Dr. Wenders admitted that the geographic extent of the market for new  :

industrial customers could be nation-wide or even world-vide. This is an incredibly broad market, and plaintiffs made absolutely no effort to measure the i= pact on co= petition which would occur in this market as a result of defendants' alleged antitrust violations. The case law also does net support such a broad reading of the term market in a Section 1 case, or for that matter, in a Section 2 case either.

^ Dr. Wenders' definition of competition in an economic sense, as I understand it, was that if a custocar had a reasonable alternative choice (and he never did adequately define exactly what he meant by reasonable alternative choice) to buying electric power from the defendants, then there was competition with the defendants. The sa=e would be true with the plaintiffs. Thus, for exa=ple, when an industrial custocar considered locating in the ELP service territory and other territories around the country, including CPL, HLP would be competing with those territories including CPL even though HLP did not seek the customer, did not want the business, did not know it was being considered by the customer as a possible location, did not know about the alternative choices being considered, 2nd electricity rates and reliability were not of any consequence in a customer's decision to locate in one service territcry or another. Dr.

W anders also testified that as to product market, all types of fuel were reasonable alternatives or could be reasonable alternatives to electricy, and were thus in co= petition with electricity, including batteries, wood, gas, wind = ills and solar power. Under the Sherman Antitrust Law, I cannot accept these definitions of competition either. They are far too broad, and in fact, I am not aware of any court that has accepted these broad definitions of either product or

( geographic market. If I were to accept these definitions, I would, it see=s to me, be virtually elf ninating the concepts of geographic and product market from consideration in an s

l antitrust case.

l

o*

Dr. Wan ders testified about a coordinated services market which. on cross avamination, he admitted was not ,

really a market where con etition occurred, but. rather an area of cooperation. The competition occurred at markets, in his w:rds, " downstream", of this coordinated services market, but the allegations in this antitrust case, he admitted, relate to an alleged violation of Section 1 that resulted in failure of the defendants to cooperate in this so-called coordinated services market which then had an indirect effect on the downstream markets.

I am not sure if plaintiffs are really advancing Dr.

Wenders' theory or not; one of the proble=s I have had with this case has been that just when I understand all of the theories plaintiffs are advancing in their claim under Section 1, their theory of the case shifts to accomodate r.

change in case law or arguments by the defendants. Assu='.ng Dr. Venders is correct in his analysis of plaintiffs' cas however, it is certainly not a violation of $ 1 of the Sher =an Act to refuse to cooperate in an area where there is currently no competition between the parties. It would rewrite the antitrust laws, which the plaintiffs seemed to be suggesting should be done in a number of areas, for this court to say that it was a violation of $1 for the defendants to refuse to cooperate with the plaintiffs.

Plaiu iffs failed to establish the size, scope or geographic limits to the downstream markets. Furthermore, plaintiffs did not'show any threatened harm to compe.'. tion in these markets. Specifically, there is no proof that even if plaintiffs' rates increased, they would lose business or be unable to attract new business because of.some unidentified increase in their rates attributable to the inability to operate in Mode 4 A review of the evidence demonstrates that plaintiffs failed to prove substantial effect on competition in any of l the downstream markets. To begin with, plaintiffs assets that there is competition for franchises to serve retail l

load in the cities and towns within Texas. TherE is no it.

e

evidence that HLP has ever lost a franchise or that another

. utility has ever been been franchised in a town in i,dich HLP -

had a franchise. No HLP franchise will expire before 2,007 and no CPL franchises will expire for many years. There was no evidence that Plaintiffs and defendants have ever competed for franchises and no evidence that they will in the future.

Dr. Wenders admitted that defendants would have no economic incentive to disadvantage plaintiffs in regard to franchise competition. Finally, plaintiffs made no effort to measure f' the amount of competition involved with fran'chises.

Plaintiffs also contend that they will be disadvantaged in interfuel co= petition. The interfuel market, as described by Dr. Wenders, includes virtually every conceivable energy source which could serve as a substitute for electric energy.

As I have stated, this is an extremely large market, and plaintiffs made no atta=pt to measure the amount of ec= petition in this market. Likewise, plaintiffs made absolutely no effort to measure the impact on competition within this

(~

market as of the time of defendants' disconnections on May 4, 1976. Finally, plaintiffs' economic expert admitted.that the defendants would have no economic incentive to try to affect such competition.

Plaintiff next advanced a co=petitive theory of self-generation with respect to the choice that their custo=ers 12 ave N generate their own supplies of electricity. Dr.

Wenders admitted that the feasibility of self-generation of electricity usually depends upon the availability of waste steam. With respect to its customers who have waste stea=

I available, however, HLP encourages self-generation. As with interfuel competition, plaintiffs made no effort to define the size, scope of geographic limit of this market. Moreover, plaintiffs totally failed to demonstrate how decisions by

~

their customers to consnence self-generation would have any i l

(

effect on competition among the electric utilities, including plaintiffs and defendants. l Again, with respect to wholesale competition, plaint' ifs failed to define the size l scope'and geographical limits of i

t t

• l

NO l

such market. Dr. Wenders even volunteered that while he ,

1 thought wholesale competition related primarily to TIS, the geographic extent of this market was limited only by the distance at which electricity could be transferred economically.

Plaintiffs made no effort to establish this distance, and again it c:ust be presu=ed that this market would be extre=ely broad since plaintiffs are themselves planning to transmit poin; to their affiliated companies in Oklahoma, Arkansas and Louisiana under CSW's interconnection proposals. There was no attec:pt by plaintiffs to show that ce= petition in the wholesale market would be restrained by plaintiffs' inability to is71e=ent Mode 4 More specifically, there was no showing that even if plaintiffs' rates were increased, they would lose existing wholesale customers or would be disadvantaged in competing for new wholesale loads. At most, plaintiffs showed that there were a few situations in which wholesale customers in Texas switched suppliers for reasons that may or may not have been related to differences in electric i.

rates, but there was no evidence of competition between plaintiffs and defendants for wholesale customers. Mr.

Jordan, president of HLP, testified that HLP had only one wholesale customer and that HLP did not want any more wholesale customers.

With respect to retail customers, direct competition a=ong electric utilities in Texas is possible only in areas where the PUC has certified two or more utilities to provide service. There is affir=ative evidence that there is no dual certification of territories served by plaintiffs and defendant HLP. The amount of load served by TESCO in areas duly certified with WTU amount to approximately one-half of 1% of TESCO's total load. Accordingly, the potential for retail competition among the parries is so mini =al as to be virtually non-existent.

Plaintiffs have atte=pced to bolster their theory of retail co= petition with assertions that the parties co=pete for the location of new industrial custocers in their se'vice r

areas. WhilethereappearstobeevidencethatIllthe w

e

} .

parties have made efforts to attract new industrial customers in the past, the changing economic conditions for electric utilities in Texas during the 1970's, including rising costs and fuel shortages, have reduced, if not eliminated the incentives these utilities might have in seeking to obtain industrial or wholesale customers. EP had abolished its area development, department by 1973.

There was ample testimony that although there had been industrial company inquiries to the plaintiffs concerning electric races in their area, electricity is not really a significant factor, except perhaps in one or two industries that are not well represented in Texas, in a decision to locate a plant in one location or another. Corporations deciding on chs location of new industrial plants nor= ally consider a wide range of factors, including availability of raw materials, location of markets, transportation costs, and taxes. Compared with other factors, the cost and g availability of electricity have had little or no significance in influencing corporate decisions concerning locations of industrial plants in Texas. Plaintiffs in fact failed to show a single instance where a decision to locate a new plant was based primarily on electric rates. Added to this is the fact that plaintiffs did not cite a single situation in which both' plaintiffs and defendants were actively atte=pting to induce cl.: same industrial customer to locate in their respective service areas.

Plaintiffs' exhibit 733, which represents duly certifi.ed areas in the m system, shows a very few towns that are duly certified with very small populations. Finally, and these are just a few exa=ples of many instances that I can cite, M told the Justice Department, TESCO 296; DHI 68; DHI 156, that TESCO and M did not compete, at a time that the Justice Department was investigating to detemine whether or not possible antitrust violations had occurred in the Commanche Peak project; CFL made the same admission. DHI 199, DEI 200. Apparently M 's and CFL's definition of competition, for antitrust purposes, has changed'since the em O

time of that response.

I also did not find Dr. Wenders to be a very credible ,

or qualified witness, and I will outline in brief some of the reasons I reached that judgment. Dr. Wenders based his testimony on the record in this case and on the depositions on file in this case, as well as his own investigation. Dr.

Wenders unqualifiedly relied on r.he_ depositions on file in this case, and subsequently qualified that statement in a very significant respect, when on cross examination he said he did not agree with everything Dr. Gols had said, including a definition of competition offered by Dr. Cols that differed from Dr. Wender's definition. And, although he said he based his testi=eny in the actual transcript of this case, it appears that Dr. Wenders had read selected portions of the transcript, and in some instances had only read the direct examination of some witnesses, excluding the cross exanination. His outside preparation to determine the

('

proper market analysis also appeared to me to be rather selective. In short, Dr. Wenders i= pressed me as an expert who selected material favorable to"an analysis of this case that favored the theories advanced by the plaintiffs, ignored the evidence or theories produced by the defendants, and chose not to make a complete review of the record or evidence available, leading me to view his conclusions with grave suspicion.

I think, from the record, and considering what I have said so far, that if any product and geographic market has been shown, the correct product market should be limited to electricity and the role geographic market should be limited to the physical service areas of the plaintiffs and defendants because that is where the direct competition, if there is any, and I think there either is none or de mini =is i l'

competition, occurs. United States v. Marine Biologists, Inc., 418 U.S. 602 (1974). .

Aside from plaintif.'a' failure to show any meaningful or significant co=petitien a=eng electric utilities in Texas, they totally fail to prove that defendants were 9

l i

motivated to any , degree whatsoever by any anti-competitive intent in their decisions to disconnect from plaintiffs on May 4, 1976. In fact, plaintiffs did not show that defendants even considered possible effects on competition prior to the disconnections on May 4, 1976. Defendants' representatives testified,that they decided to disconnect because interconnection with the Southwest' Power Pool, which could result from a failure to sever connections with plaintiffs, would produce

(

a heavy economic burden for their customers without offsetting advantages, would degrade the reliability of their electrie syste=s, and would i= pose additional costs associated with federal regulation. Plaintiffs presented no evidence to the contrary and do not even assert that defendants had an anticompetitive purpose in deciding to d'.sconnect and preserve their right to decide for themselves whether to coccence interstate operations.

Plaintiffs' theory of the co=petitive i= pact resulting from defendants' disconnections on May 4, 1976 proceeds indirectly through several steps. ,First, plaintiffs contend that the disconnections precluded them from implementing Mode 4 which would reduce their costs and revenue require =ents.

Second, higher costs and revenue require =ents would presu= ably cause plaintifs to have higher rates. Third, assuming plaintf.ffs had higher rates, they would theoretically be hampered in their ability to compete in various " downstream" retail and wholesale markets for electric service. Contrary to this multi-faceted theory, plaintiffs' company witnesses admitted that they had no knowledge of any lost customers or other competitive disadvantages suffered by plaintiffs as a result of defendants' disconnections. Morecever, plaintiffs' economic expert Dr. Wenders, ad=itted that if plaintiffs could obtain greater economic benefits from intrastate operation as opposed to interconnection with the other CSW subsidiaries in interstate coccerce, plaintiffs' whole theory of ce=petitive i= pact would fail. On . this record I think plaintiffs are better off remaining in' intrastate co==erce

-. _ . ,.......... --_..__. . . , - _ ,._ ~ _ . 1 e

l .

Finally, despite all of his testimony concerning theories of cosipetition and competitive impact Dr. wonders had "no idea" whether it was reasonable or unreasonable for defendants to disconnect from plaintiffs under the circiasstances of May 4, 1976. In Dr. Wenders' words "May 4th, to me, is a matter of sideshow."

Price Fixing An agreement that interferes with the setting of price i

j by free market forces is illegal on its face. United States n

(' vs. Container Corp. , 393 U.S.333 (t%9 ) . The per se rule applies even when the restraint on prices is somewhat indirect. Simosen v. Union 011 Co., 3'77 U.S. 13, 16 to 22 (19M); United States vs. General Motors Coro. , 384 U.S.

127, 147 (1966). The court must examine the purpose of any alleged agreement to fix prices, however, just as it examines the purpose of any alleged group boycott. United States v.

General Motors Corp., 340 U.S. 127, 127 (1926). .

"(I)f a manufacturer is unwilling to rely on individual self interest to bring about general voluntary acquiesence, which has the collateral effect of eliminating price competition, and takes affirmative action to achieve unifona adherence by inducing'each customer to adhere to avoid such price competition, the customer's acquiesence is not then a matter of individual free choice prompted alone by the desirability of the product. The product then comes packaged in a competition free wrapping--a valuable feature in itself--by virtue of concerted action induced by the manufacturer. The manufacturer is thus the organizer of a price maintenance combination.or

• conspiracy in violation of the Sherman Act."

United States v. Parke Davis 8, Co. , 362 U.S. 29, 47 ( s%c ).

"(A) combination formed for the purpose of fixing, pegging, or stabilizing the price of a commodity in interstate or foreign comunerce is illegal per se."

United States v. Secony vacuum 011 Co., 310 U.S. 150 (My0 There are a number of examples of typical price fixing cases, such as the exchange of price fixing information with an agreement to adhere to a price schedule, Sugar Institute v.

United States, 297 U.S. 553 04w), United States vs. Socony- -

Vacuum 011 Co., 210 U.S.150 4U9 ; agreements to e14=hmte sales of a product by competitors in order to protect against real or apparent price competition, United States v.~ General Motors Corp., 384 U.S.127 (1966); and refusal to deal with wholesalers who did not cooperate with the company's, goal of m . . __ _ _ _ _ . _ _ _ _ _ _ _ _

l 1

)

4 obtaining adherence to suggested mini-"= retail prices, United States vs. Parke Davis 'Co. , 362 U.S. 29 (A:,o ),

• United States vs. Sealy, Inc., 388 U.S. 350-(1967). When per se treatment is inappropriate, the court should examine the allegations under the rule of reasc3 standard. In Re Nissan Antitrust Litigation 577 F.2d 910 (5th Cir.1978) .

The power, to fix prices, whether reasonably exercised or not, involves power to control the market and to fix arbitrary and unreasonable prices. United States vs. Trenton Potteries Co., 273 U.S. 392, 397, (1927). ,

Plaintiffs have evaluated several modes of future operation of their systems. Under one mode, (Mode 4), WIU and CPL will allegedly engage in completely interconnected interstate operation with TSO and SWEP, have their generating plants centrally dispatched with those of PSO and SWEP and retain their interconnections with the other TIS companies, including TESCO and HLP, placing the latter companies in interstate commerce. Under another mode (Mode 2) WJ and CPL will engage in completely interconnected centrally dispatched interstate operation with TSO and SWEP, but will not retain their interconnections with any TIS co=panies including TESCO and HLP and those latter companies will remain in intrastate operation. Plaintiffs also evaluated another mode of operation (Mode 1) which refers' to that mode of operation in which all ERCOT member companies are interconnected.

directly or indirectly, but have no direct or indirect interconnections electric utilities operating in interstate comunerce.

I th hk I have already indicated that I do not think this case falls within the traditional concept of a price fixing case. There has been no effert by the defendants to set either mini =um or maximum prices, or to exchange. price ,

information or to in any way protect prices. The only relation this case has to prices is plaintiffs' argument, that because defendants' actions allegedly affect or will affect over the next 20 years the prices the plaintiffs charge for electricity and these charges, being' higher than

=

/

t 1

if Mode 4 were i=plemented, will affect plaintiffs' competition in the electric industry with the defendants. I have already t rejected that broad theory of price fixing as transforming all antitrust cases into price fixing cases, and I find no inter-farence in this case by the defendants with the free c:arket forces at work in the business world. "A manufacturer's refusal to deal with a distributor or dealer does not violate the antitrust laws merely because it adversely affects the entity refused." Marquis v. Chrysler Coro., 577 F.2d 624 (9th Cir. 1977). These effects are i==aterial if the refusal is for business reasons which are sufficient to the manufacturer as long as there is no arrange =ent restraining trade.

Marquis, supra; Joseeh & Sons, Inc. vs. Hawaiian Inc. Oaks and Liouers Ltd. , 416 F.2d 71 (9th Cir.1969) .

Plaintiffs' evidence concerning the defendants' effect on plaintiffs' prices of electricity.due to the refusal to inter-connect into interstate co==arca and integrate the CS*J

(~ system is not persuasive to me. The existence of a threatened injury to the plaintiff companies is also a requirement for the extreme injunctive relief sought by the plaintiffs.

Zenith, supra.

Plaintiffs' first evidence of the injury to the plaintiffs by this alleged violation of $ 1 was s' study conducted by Power Technologies, Inc. '*1'his particular study was triggered by specific questions raised before the Securities & Exchange Cocsission involving C&S*J's present operating pattern. The possibility of changing this pattern raises 'the broad question of the possibility of altering the basic operating pattern of the entire region to one where all utilities in ERCOT and S*='PP are interconnected. This study does not atte_pt to ersmine and answer directly this broader question but instead evaluates the three alternative possibilities in te==s of the potential economic i= pact on each of the' customers of C&S'a"' . Page vii-viii PTI study, Px. 671. Thus the study was ce=d.ssioned t.ot because plaintiffs had long desired to enter interstate co=lerce ner because they felt defendants were boycotting them, but rather it was done in response to O

l' .

s.

the SEC proceedings in which a group of utilities challenged CSW's holding company statua. This, in my mind, throws into  :

serious doubt the credibility of the studies that were conducted by CSW, some of which were going on and were completed only after the beginning of this trial. The PTI study had a definite purpose in mind: to examine the cost of integratizig the CSW system and it did not consider the impact on ERCOT in terms of cost or alleged savings, and in p fact did not break out the savings for the plaintiffs in this case.

The PTI study did not undertake to evaluate the best mode of operation for WTU and CFL nor the best mode of operation for PSO and SWEPCO nor the test mode of operation for utilities operating in the State of Texas or in SWFP. I am not able to place much faith in such a dictated study, and the other studies introduced into evidence by the plaintiff following the PTI study are also, I believe tainted with

(.-

the same questionable motive. I discussed earlierplaintiff's motive which' I have taken into account, so .I will not expand on this point any further.

I will note a few things about this study and the other studies. For exa=ple, in the PTI report Dr. Wood relied on CSW's o,perating committee to get his information on fuel availability for power plants put in the generation plant, and the CSV planning subcommittee for load forecast and fuel cost. These two factors were very i=portant in the study, but rather than making an independent analysis (or being permitted to make that analysis) he principally relied on CSW for the information. In Mode 1 Plan One,which I recognize has supposedly been abandoned by the plaintiffs now, its base case application in comparison to Mode Four, Plan 11 was seriously hampered by the fact that Mode One'l Plan 1 contained a large number of very small generating units as compared with the preferred plan. While Mode 4 was developed by PTI, l

the economic results were compared to Mode One, which was developed by CSW personnel.

No plans were drawn by Plaintiffs whichwep,ei=1 zed"(touse

per se illegal under the Sherman Antitrust Law. Fashion Originators Guild of America, Inc. vs. FTC, 312 U.S. 457'

. (1941). The principle of the group boycott cases is that where businessmen concert their actions to deprive others of access to merchandise which the latter wish to sell to the public, we need not inquire into the economic motivation underlying their conduct, 'because exclusion of traders from themarketibymeansofcombinationorconspiracyisso inconsistent with the free market principles embodied 'in the Cherman Act that we vill not consider any alleged justification.

' United States vs. General Motors, 384 U.S.127,146 (1946) .

Group boycotts are not saved by allegations that they are reasonable in specific circumstances nor by failure to show that they " fixed" or regulated pricas, parceled out or limited production, or brought about a deterioration in quality". Klor's v. Broadwav-Hale Stores, 359 U.S. 207, 212 (1959) quoting, Fashion Originators, at 466-468. It is of no consequence under the Sherman Act that each party acted

(' in its own lawful interest and it is unnecessary to find an explicit agreement to find the Sher =an Act conspiracy.

United States v. General Motors, 384 U.S. 127 (1966).

It is the intent to eliminate competition that deter =ines the illegality of a joint refusal to deal. The court must examine the purpose and intent of the alleged conspirators, not to deter =ine whether or not the defendants engaged in a refusal to deal to achieve purported beneficial results brought about through che elimination of competition, but rather to discover whether or noc the purpose and intent was anticompetitive. .

For example, in Kiefer-Stewart Co. vs. Joseph E. Seagram

& Sons, 340 U.S. 211 (1951) the court stated, quoting from United States v. Socony Vr.euum Co.:

"Under the Shernat. Act a combination for=ed for the purpose and with the effect of raising, depressing, fixing, pegging, or stabilizing the prices of a commodity in interstate or foreign cor=arce is illegal per se." s m

e

4 ~+

and Eastern States Lumber Deelers Association y. United

! States 234 U.S. 600, 606 (1914) the court stated: e

"...it appears that the defendant associations 2

have for their object, among other things, the adoption oi ways and maans to protect such trade and to prevent the wholesale dealers from intruding

.th erein.

Other group boycott cases also indicate that the Court i must consider whether or not the alleged group boycott had q the requisite anticompetive purpose. Associated Press v.

United States, 326 U.S.1 (1945) (holding that a bylaw was

" plainly designed in the interest of preventing competition.");

Radiant Burners Inc. vs. Peoples Gas, Light & Coke Co., 364 U.S. 656 (1961); United States vs. General Motors Corp., 384 U.S. 127 (1966); Binderup vs. Pathe Exchange, 263 U.S. 291 (1923) ("the alleged purpose and direct effect of the combination  !

and conspiracy were tg put an end to these contracts . . .

{ and restrict . . . the liberty of a trader to engage in business." at 312). The plaintiffs need not shov specific intent on the part of the defendants to restrain trade; in J

an antitrust case, it is unlikely that there will be an express agreement in violation of the antitrust laws, and

therefore circumstantial evidence assumes a heightened importance that may sustain a finding of a conspiracy.

Ruthlin v. Capitol Cement Co., 571 F.2d 290 (5th Cir.

1978); In Re Tarn Processing Patent Validity Litigation, 541 F.2d 1127 (5th Cir.1976).

The Fifth Circuit has recognized three types of group boycotts that are per se violations of the antitrust laws; (1) horizontal combinations among traders at one level of distribution, whose purpose is to exclude direct competitors from the market. _(for example, Eastern States Retail Lumber);

(2) vertical combinations among traders at different marketing levels, designed to exclude from the market direct competitors of some members of the combination (for example, Klors v.

Broadway-Hale Storas. Inc.) and (3) combinations designed to influence coercively the trade practic's of boycott l

a

l 88 victi=s rather than to eli=inate the= as competitors (for exa=ple, Fashion Originators). E.A. McQuade Tours, Inc.

vs. Consolidated Air Tour Manufacturing Co., 467 F.2d 178 (5th Ctr. 1972). "In all of these cases, the touchstone of per se illegality has been the purpose and effect of the arrangement in question. Where exclusionary or coercive conduct has been present, the arrange =ents have been viewed as ' naked' restraints of trade' and have fallen victim to the per se ale. On the other hand, where these ele =ents have been missing, the per se rule has not been applied to collective 1 zefusals to deal. McQuade at 186-7. Where exclusionary or coercive conduct is not present, the court should apply the rule of reason test to determine whether there is a violation of the Shar=an Act. Hatley v. A=erican Quarter Horse Association, 552 F.2d 646 (5th Cir. 1977).

I must exercise extreme caution in applying a per se label to conduct that allegedly violates the antitrust laws.

"To outlaw certain types of business conduct merely'by

' attaching the ' group boycott' and 'per se' labels obviously invites the chance that certain types of reasonable types of reasonable concerted activity will be prescribed". ,

Worthem Bank & Trust v. National Bank Americard, Inc., 485 F.2d 119 (8th Cir. 1973). While it is true that the Supre=a Court has outlawed group boycotts as per se illegal,"a multitude of lower courts have continued to evaluate alleged boycotts under a ' rule of reason' analysis rather than by the per se doctrine employed by the Supre=e Court in the aforementioned cases. As one ce=nentator has observed,

'the law in Washington, however, is quite different frem the law in the rest of the country. ', Woolley .Is A Boycott. A Per Se Violation of the Antitrust Law 1, 27 Rutgers Law Review 773 (1974)", Cullum Electrie & Mechanical Inc. vs.  !

l Mechanical Contractors Association of South Carolina, 436 i F.Supp. 418 (D.C. S. C.1976), and the Fifth Circuit closely scrutinizes group boycott allegations. See E.A. McQuade j i

.o .. .

Tours Inc. vs. Consolidated Air Tour Mfg. Co., 467 F.2d 178 l

(5th Cir.1972); Su1= eyer v. Coca Cola Co. , 515 I.2d 835 1

1 1

(5th Cir.1975); Hatley v. American Quarter Horse Association, 552 T.2d 646 (5th Cir.1977); Coughlin v. Capitol Cement -

h , 571 7.2d 290 (5th Cir. 1978); Pender v. Huggins Fish Co. Inc., 570 T.2d 1209 (5th Cir. 1978).

As I read them, then, there are three types of group boycott cases recognized by the Fifth Circuit, and a requirement that the alleged boycott have an antico=petive purpose, with exclusionary or coercive conduct; I don't think this case fits any of those descriptions.

s First, there has been a=ple testi=eny in the record (for instance, the testi=eny of Hardy and Price) that there is no direct co= petition between CPL and either HLP cr TESCO, and no direct ce= petition between TESCO and HLP vich kTU, except de=inimus ce= petition in certain areas duly certified to TESCO and kTU.' So this case does not fit within the first two McQuade categories of group boycotts that involve direct co= petition.

p Second, the key to the third category of group boycott cases cited in McQuade was the " coercion practiced indirectly on a rival =ethod of co= petition. . i" at 187. In Fashion

~

Originators, cited by McQuade as an exa=p1e of this third category, a group of gar =ent manufacturers refused to sell original designs to stores that stocked copies of those designs made by other manufacturers, and thus there was a conspiracy to eliminate the copiers from the =arket. Here, except in certain multiply certified areas I mentioned earlier, there is no direct co= petition between plaintiffs and defendants. Defendants can't conspire to deprive plaintiffs of a market they do not share and, under the Public Utility Ccenission of Texas' (PUC's) certification procedure, they cannot share since utilities are certified for only certain areas. I will discuss this competitive aspect of the case in more detail later in this opinion.

Third, I =ust examine the purpose of the alleged boycott.

HLP and TESCO's purpose in re=aining in intrastate cc=merce was to avoid TPC jurisdiction. The second purpose was to serve the best interests of their custo=ers by p'reviding

'I s.

reliable, economical power. Onthisrecordafterhbaring '

all the testimony, I do not find that the purpose was jin any way saticompetitive or coercive because plaintiffs do'not <

meet their burden of showing any competitivc c: cive ,

intent. [ .

If I ,as to find a Sherman Act violation in this case, I must also find a contract, combination, agree =ent or conspiracy in restraint of trade. As I understand the pleadings and the evidence, the plaintiffs are clai=ing that over a period of some 40 plus years, at least since the adoption of the s

Federal Power Act in 1935, the defendants have been engaged in a combination and conspiracy, the essence of which is recorded in certain contracts between the defendants, to \

restrict the flow of power in the defendant companies to intrastate con =erce.

To anay1ze this allegation properly, it is important to understand that unilateral refusals to deal, without more

' and "in the absence of any purpose to create or maintain a monopoly", are lawful under the Sher =an Act. United States

v. Colgate, 250 U.S. 300 (1919); United States v. Park, Davis & Co., 362 U.S. 29 (1960). A manufacturer has a right to select its customers and to refuse to sell its goods to anyone for reasons sufficient to itself, and "(1)nherent in this right is the opportunity to show unilateral as opposed to conspiratorial. conduct at trial." Coughlin v. Capitol Cement Co., 571 F.2d 290 (5th Cir. 1978).

I recognize, as did the Fifth Circuit in Coughlin, in footnote 22, that the so-called Colgate Doctrine has been carefully circumscribed by the Supreme Court. The doctrine does not apply to a case where there is an agreement between the seller and a purchaser to maintain resale prices, United States v. Bausch & Lome Optical Co., 321 U.S. 707 (1944),

and United States v. Parke. Davis & Co. , 362 U.S. 29 (1960), .

and a producer secures adherence to prices by means which i go bhyond his mere declinati'on to sell to a custo ar who will not observe this announced policy. See Parke. Davis ,

and Beechnut. "However, the post-Colgate decisions of the O

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Supre=a Court do not in any way limit a manufacturer's right to atta=pt to disprove the existence of concerted action."

Coughlin at 301, footnote 22.

I do not think that the plaintiffs have proved concerted

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action in this case. They have established that both HLP and TESCO want to remain in intrastate coc=erce and that they both wish to do so to avoid FPC regulations. Plaintiffs also established that TESCO and HLP took measures, such as flying the Red R10er (as Mr. Robinson testified), or checking the power flow relays and points of interconnection, to protect against inadvertent interstate flows of electricity. I think the evidence, 'covever, shows that each of the co=panies, including ths plaintiff companies, who, interestingly enough, did not object to this intrastate arrangement and apparently wanted to participate in that type of operation until around 1974-75, decided that for one reason or another, the intrastate method of operation which would avoid FPC jurisdiction was the f -

method of operatica that each wanted to pursue. Plaintiff i companies apparently did this because they saw high i==ediate ecsts of interconne ning interstate rather than re=aining I

1.strastate (see Px 19) although plafutiffs apparently made no long range study, as they now have, to determine the long range economic costs and savings of interstate vs. intrastate operations.

The evidence also shows that each of the companies, including plaintiffs and defendants, have always had the opportunity for withdrawing from the intrastate method of operation in connecting interstate. None had elected to do so until May 4, 1976 (except in the war years, and other unusual situations), and there was ample evidence that the only objection defendants had to plaintiffs' withdrawal from intrastate operations and connection to interstate operatien on May 4, was that the defendants were not per=itted to make their own independent decision about whether or not to join the plaintiffs in that decision; the decisien was forced upon them. For a period of ti=e on that day defendants were involuntarily drawn into interstate operation because of the midnight wiring.

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4 I think one of the most da= aging pieces of' evidence to plaintiffs' conspiracy theory is the fact 'that when, on May .

4, the defendants were involuntarily placed in interstate consnerce, they each disconnected from all other utilities, not just WIU and CPL, in order to isolate their systa=s because they were not sure whether or not these other utilities, j l

who had not participated in the midnight wiring, would  !

l remain in iz.terstate co=arca. If there was as agreement, ,

combination or conspiracy by defendants ameng themselves to remain in intrastate co=erce, it certainly would not have been necessary to disconnect from everyone and isolate their systems. TESCO clearly did not know whether HLP would remain in interstate cec =arce; and ELP did not know whether TESCO would re=ain in interstate co=erce either. Even though up to May 4, 1976, each defendant thought the other defendant was cocnitted to intrastate operation, there was clearly not a firm understanding or a joint conspiracy to -

( that effect or the disconnections woulli have been unnecessary, as between the defendants.

A lot of contracts have been introduced in this case, and the plaintiffs claim that these contracts evidence the agreement by the defendants to re=ain in intrastate coc=erce.

Some of the contracts have clear indications of intention that the parties will remain in intrastate co=erce; other have clauses which indicate that the contracts are cancellable on certain notice if the parties wish to enter interstate commerce. The plaintiffs were parties to some of these contracts and never complained about them, perceiving them to be in their own best interest for nearly forty years before suddenly objecting to their character.

Justice Brandeis once observed that all contracts were really restraints of trade and thus violated the Sher =an Act, if the Act were carried to ilbgical extremes. These contracts do restrict the flow of electricity to intrastate cocnerce, but I do not find that they force the plaintiffs to re=ain in intrast. ate coc=erce. Plaintiffs have the choice of abiding by the contracts and remaining 'in intrastate

coc=erce, or deciding to go into interstate coc=erce and cancelling the contracts. I think it is significant that y different contracts were negotiated between the different parties with different provisions relating to the intrastate flow of electricity over the years.

Here I think is a situation that is covered by the Supreme Court's ruling in Colgate: None of the defendants are doing anything more, and have dene nothing more, than decline to sell to any utility, not just plaintiffs, who are

' engaged in interstate electrical operations, or to connect with that type of utility. No one has forced the plaintiffs to re=ain in intrastate coc=erce; ,they are free to leave that mode of operation whenever they choose to do so. And each of the defendants is free to do so, also. The contracts do not limit that freedom; they merely make clear to the parties to the contract that the exchange of electricity provided for in the contract is premised on the intrastate character of that electricity. The contract provisions only preserve nach party's right to operate on an intrastate basis.

See 16 U.S.C. 5 824(b) . An effort to avoid FPC regulation is "not unlawful, is indeed not L=soral--not even if it f ails."

Hartford Electric Light Co. v. FPC, 131 F.2d 953, 960 (2d Cir.

1942) See also Connecticut Light & Power Co. v. FPC, 324 U.S. 515, 518-19 (1925), and on re=and, Connecticut Power &

Light Co., 6 F.P.C. 104, 110 (1947).

Conpetition The Sher =an Act requires that the Court find, when evaluating this case under the rule of reason, anticocpetitive effect, and when looking at this case as a group boycott or one of the other per se theories, I must look to see if there was an anticompetitive purpose. In addition, the Court must look at the competitive i= pact of the alleged Sherman Act violations to determine the scope of the requested injunctive relief. Zenith Radio Corp. v. Hazeltine Research, ,

l 395 U.S. 100 (1969). 1

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l To determine an agreement or act's anticompetitive purpose or its impact on co=petitive ' conditions, the' court

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must have a thorough understanding of the competition between p1'aintiffs and defendants, including the geographic and ,

Product market in which they compete. Northwest Power Products. Inc. v. Omark Industries. 576 F.2d 83 (5th Cir.

1978); Dougherty v. Continental 011 Co., 579 F.2d 954 (5tli cir. 1978). Although decided in a slightly different context, the cases. decided under I 7 of the Clayton Act are helpful  ;

in identifying the types of competitive interests which are protected by the antitrust laws. ,

In' United States v. General Dynamics Coro., 415 U.S.

486 (1974) the Supreme Court affirmed the District Court's decision that the economfr reality of the coal industry at the critical time was such that United Electric Coal Co. was not in a position to compete with anyone because its reserves were limited and were also totally cousitted to long term contracts with utilities. In addition, in United States v.

Marine Bancorporation, Inc. , 418 U.S. 602 (1974) the Supreme

( Court held that NBC (a Seattle bank) was not a competitor of kTB (a Spokane bank) because NBC did not market goods and services in the Spokane bank's area'of operation. The court held that the " relevant geographical market" was the areas in which the relevant product was, in fact, marketed by the alleged ce=petitor.

"The proper question to be asked . . .is not whether the parties . . . do business or even where they compete, but where, within the area of competitive overlap, the effect of the merger on competition will.be direct and i==ediate.

(citations omitted) This depends upon the ' geographic structure of the supplier-customer relations'. . ." United States vs.

Philadelphia National Bank, 374 U.S. 321 (1963). Where two department stores sold entirely different types of merchandise and only 27,-5% of the merchandise was sold by those stores, the two stores were not competitors, and to hold that they were " competitors" would be to ignore the realities of the situation. Evans vs. S.S. Kreste Co., 544 F. 2d 1184 (1976).

The definition of market under $ 1 of the Sherman Act is different from the definition under $ 2. Col b ia Metal e

Etc. vs. Kaiser Aluminum & Chemical Co., 579 F.2d 20 (3rd Cir. 1978). "The $ 2 market definition looks to be existence of competitors as evidence of coustervailing power which would preclude monopolization. Section 1, in contrast, is concerned with patterns of competition as a means of judging whether a restraint of trade is unreasonable". Colu=bia.

3;;;;ln. " Prohibition of conspiracies in restraint of trade, except where practices fall urder a judicially crafted per se ban, a finding of illegality presupposes the determination

.in any given case that the 'effect upon competition in the marketplace is substantially adverse. '" Colu=bia, suora at

26. The inquiry must focus on the percentage of business controlled, the strength of the remaining competition, and whether the actions spring from business require =ents or purpose to monopolize. Times-picavune Publishing Co. v.

United States, 345 U.S. 594, 615 (1953); Colu=bia, suora.

In drawing the narrow circle around the relevant product

market, care must be taken to exclude any product to which, within reasonable variation and price, only a limited nu=ber of buyers will turn. Coluchia, suora. Analysis of the market may reveal well defined sub-markets for antitrust purposes whose boundaries can be determined by examining industry or public recognition, or the sub-market as a separate econo =le entity, the products peculiar characteristics or uses, unique production factilities, distinct custo=ers, distinct prices, sensitivity of price changes, and specialized vendors. Rewn Shoe Co. v. United States, 370 U.S. 294, 325 (1962).

I can find no evidence of competition between plaintiffs and defendants for purposes of the Sher =an Act. First, there is no direct competition between the plaintiffs and defendants except in the limited dual certification areas or fringe areas of WTU and TESCO,which is only determined compecition. ,

1 The Texas Legislature expressly recognized the absence of I meaningful competition among electric utilities by stating:

" . the legislature finds that public utilities are by definition monopolies in the areas they '

serve; that therefore the nor=al forces of compe-tition which operate to regulate prices in a free ene.m rine'aneterv do not ocerate; and therefore l

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l utility rates, operations, and services are regulated by public agencies, with the objective that such regulation shall operate as a substitute for such competition. . ." Tex. R.Civ. Stat. Ann. .

Art. 1446(c).

Electric utilities in Texas are required to serve all

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customers in their certified service territory. They are permitted to operate only within and are prohibited from serving beyond the geographic limits of their service territory as approve'd by the PUC. They are also required to sail electricity at rates established either by the PUC or by an incorporated municipality, and are prohibited from offering a special rate to customers.

Plaintiffs have admitted to the U.S. Department of Justice, which was then conducting an antitrust review in connection with licensing of the construction of nuclear powered generation plants, that there exists no ce= petition between plaintiffs and defendants and that the defendants' maintenance of their intrastate status did not injure plaintiffs' ability to compete with others. Retail competition exists only among utilities within duly certified areas, and ELP has no duly certified areas with VI'U or CPL. TESCO has no duly certified areas with CFL and the areas which are duly certified between M and TESCO are so insignificant that the revenue to TESCO in 1977 from customers located in those areas constituted less then one-half of 17. of its total revenues.

Consequnetly, actual and potential direct competition a=eng vrU and TESCO is de minimis. In addition, there exists no consequential competition in the fringe armas between the service areas of plaintiffs and defenants. These areas are sparsely populated, with no ccusequential economic growth -

and no economic incentive for WIU or TESCO to engage in competition in these areas. Plaintiffs rely primarily on 1

examples of indirect competition, therefore, to establish l that defendants and plaintiffs really compete. .

As I understand the evidence, the areas of indirect competition supposedly includei (1) competition bett'een the plaintiffs and other electie utilities, not necessarily the defendants, in areas thac are multiply certified by the '

PUC in certain fringe areas located between the 'two utilitias;

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(2) competition between plaintiffs and other utilities including defendants to attract new customers (including i

industrial, conusercial and residential, though primarily industrial) to locate in their service territory; (3) competition to retain current customers by providing low" cost reliable electric service that outperforms alternative methods available to the industrial, commercial, or residential user; and, (4) competic'.on for wholesale customers.

Some of plaintiffs' witnesses said that two utilities are in compe,trion when one utility takes some action that will affect, in some way, the price charged by the other utility for its electric power. Thus, the defendants alleged refusal to operate ele cricaily interstate has an effect on plaintiffs' prices, aJ evidenced allegedly from plaintiffs' economic testimony, and therefore plaintiffs are in competition with the defendants. The theory is that if defendants' actions raise (or restrict a lowering) of plaintiffs' price

)

it charges its customers for electricity, then plaintiffs

( vill be unable to compete effectively for new industrial customers, existing custo=ers, or wholesale customers of plaintiffs' power since those customers may be lost to cheaper forms of electricity or other forms of power. l Competition, to the plaintiffs means a choice (see Mr.

Price's testimony). Plaintiffs are in competition with all

. of those choices, and if the defendants affect that choice in any manner that affects plaintiffs' price of alectricity, plaintiffs and defendants are in competition.

I will confine my remarks here to a discussion c plaintiffs' witnesses on competition; my p ews on deft nes' affect on the price of plaintiffs' electricity are discussed later. First, though, I should point out that if plaintiffs' view of competition is correct, then every Sherman Act case is really a price fixing case. If we accept plaintiffs' view of competition, then every purchaser has an ultimate choice of whether to buy a particilar product, ar.d every manufacturer in some way (significant or insignificant) affects the price of every com=odity, thus there..are no geographic li=itations '(and probably few product limitations)

. . = , . .

I TESCO reached any agreement when TESCO made its determination to avoid interstate commerce. TESCO's determination in 1935 ,

was its unilateral effort to serve it's cusrocers in the most advantageous manner.

Interconnections were reestablished between TESCO and L'IU pursuant to a written agreement which, as a= ended from time to time, was continued in effect until cancelled on May 11, 1976. This agreement required both k'IU and TESCO to give prior notice in the event either wished to com=ence m operation in interstate co==erce so as to per=it the other to choose the type of operation in which it desired to engage; that is, in intrastate or interstate co==erce.

In 1962 ELP and TPL built a direct tie to connect their syste=s as the next major step in the evolution toward inter-dependence and cooperation. Soon thereaf ter, NTIS and FTIS were melded into the Texas interconnected systems (TIS) in 1967. At the time TIS was for=ed, all of its me=bers

( operated and wished to continue operating on anintrastate basis. (See Appendix E)

In 1970 ERCOT was for=ed, consisting of the members of TIS as well as various municipalities and rural electric cooperatives; although the na=es "ERCOT" and " TIS" are sometimes used interchangeably, the two groups do have functional differences. TIS consists of only the bulk pcwer syste=s whereas ERCOT includes all of the me=bers of TIS and small municipal and REA cooperatives. ERCOT reports to NERC, while TIS coordinates bulk power systems. Membership in ERCOT is available to any electric utility which owns, controls, or operates an electric power system in Texas, and ERCOT promotes reliable operations of power systems in Texas by providing a means to communicate and coordinate the <

planning and operation of its me=bers.

TIS is operationally coordinated with all of the generators in TIS operating in synchronism with each other.so that if there is a loss of any individual generator, all of the other generators in TIS respond automatically to co=pensate for the loss. Historically, all me=bers of TIS and ERCOT

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t o' while maintaining interconnections a=ong themselves , have not, except in times of emerger.cy, maintained interconnection,s ,

with electric utilities operating outside of the State of

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Texas.

The maintenance of interconnections'among kTU, CPL, TESCO and HLP and other systa=s in Texas was mutually beneficial and per=itted the interconnected parties to reduce the total amount of installed reserves and to exchange electric power in times of sudden emergencies. These interconnections a' Iso se sured a greater degree of electric reliability for all participating co=panies. The interconnecting electric syste=s comprising TIS and ERCOT are large enough to take advantage of all economies of scale and at the same ti=a not too large to be un=anageable. The larger an interconnected system becomes, the greater the opportunity for cascading blackout and other operating difficulties.

The interconnection agreements between kTU and TESCO

( preserved the right of system self -determination; that is, the right to decide whether to operate in interstate coc=arce subject to the consequences of FPC jurisdiction or to operate in intrastate coc=arce subject only to state and local regulatory authority. The interconnection agreement between WTU and TESCO did not require either party to continue to operate in intrastate co==arce, to maintain interconnections with each other or any TIS or ERCOT member, and was cancellable at any time by either party for any reason without penalty.

- It also did not restrict either WTU or TESCO from providing electric service anywhere.

It has been the common understanding among the~ me=bers of TIS and ERCOT that each individual system member believed it to be in the best interest of its customers to operate solely in Texas. It was also commonly understood among the members of TIS and ERCOT that if a system chose to engage in interstats coc=erce, it would. give prior notice to all other members in order to permit each other system the right to choose whether to operate solely in Texas or to operate in 9

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interstate com:nerce as it detemined was in the best interest of the custo=ars. The coordinatien in TIS and ERCOT has resulted in perhaps the most reliable and icwest cost electric power in the nation. The president of plaintiff co=pany CPL, R. W. Hardy, believes ERCOT and TIS ha* been and ar's models of effii:1ency and reliability.

INTFJLSTATE OPERATION Since August 6,1935, when Title 2 of the Federal Power Act beca=e effective, any electric utility which owns or operates facilities used for the transmission of electric energy in interstate com erce has been subject to the regulatory powers of the Federal Power C-4 ssica ("FPC"), now the

' Federal Energy Regulatory Co=nission ("FERC") (as used hereinaf ter FPC shall include 'TERC"), set forth in Title 2 of the Federal Power Act, 16 U.S.C. $$ 824 to 828C. Generally these regulatory powers include the power to order an electric utility to interconnect with another electric utility under

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certain circu= seances (16 U.S.C. $824A); the power to oversee the disposition of certain utility; assets (16 U.S.C. $824B);

the power to regulate the issuance of an electric utility securities (16 U.S.C. $824C); and the power to regulate rates for the transnission and sale of electric energy at wholesale in interstate co=erce (16 U.S.C. $ 824D.)

The record indicates that the defendants began consulting with each other regarding their intrastate operations in the 1960's. These consultations were necessitated by a variety of factors. First, HLP and TESCO's affiliate TPL built a direct interconnection in 1962. Second, the standards of jurisdiction under the Federal Power Act changed drastically during the 1960's so that defendants became concerned witti jurisdiction even though they had no facilities crossing state lines. ~ Third, these concerns were confirmed when the FPC advised the defendants in the 1960's that they were in fact subject to the FPC jurisdiction under the Federal Power Act. The FPC's effo:t to assert jurisdiction was followed v

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by its continuing effort through the early 1970's to promote the interconnection of TIS with the South West Power Pool ,

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(SWPP), which is the group of utilities operating to the north and east of TIS.

The only =sans to ensure freedom from federal regulation

- and the adverse electrical, econo =ic, operational and adminis-trative consequences flowing therefrom is not to operate interconnected with any facility used for the transmission or sale of electricity in interstate co:=arce. As a result of the events listed above, HLP and TESCO have, from time to time, consulted with each other to deter =ine whether there were points of interconnection which presented the potential for the interstate flow of electricity. Defendants were particularly concerned for many years with the points of interconnection between kiU and its affiliate PSO because of the very peculiar nature of the interconnection. Mr.

Hardy, the current chief executive officer of CPL and previously the president of kTU, testified that these interconnections I,

were designed to give CSW the ability to transfer power between its subsidiaries in order to qualify under an exe=ption under the Puolic Utility Holding Company Act.- Defendants had in fact expressed concern over these interconnections through the years but were reassured by CSW that it desired to operate its two Texas subsidiaries on an intrastate basis and that the operational split of its subsidiaries presented no threat to its holding company status.

There were installed over the years at strategic locations between the northern and southern divisions of kTU various devices to prevent interstate flow of electricity under circumstances which would render TESCO jurisdictional, and to protect.against' synchronous operation of TESCO with LTU's northern division, PSO and other me=bers 'of SWPP.

There was never any dispute between VIU and TESCO as'to the object of avoiding synchronous operation. Some disputes did develop with respect to the use of interlocks as opposed to power flow relays in order to make certain that the FPC could not order synchronous interconnecticus of TESCO with' 11 .

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.v SWPP, but these differences were always resolved to the autual satisfaction of the parties. , ,.

In order to insure the validity of the securities issued by TESCO and others, the interlock devices which were

) owned by TESCO were inspected and tested periodically through i the years. These inspections and tests did not interfere with the operations of M even though the testing of the i

interlock device did result in an ann 2a1 flicker of certain loads on m 's northern division. It would take the annual m testing of the interlocks for 240 years for any it ds on 1

l m's northern division, however, tio be interrupted for a total of one minute.

1 i, It has been the common understanding and agreement

{ among all the electric utilities and TIS that if one of the j members of the TIS decided to commence interstate operations, it would provide prior notice to the other = embers so that each could independently decide whether to exercise its t

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unilateral right to disconnect and remain in an intrastate I mode. This understanding was, for example, reflected in the M -TESCO contract which was subject to im.ediate cancellation by telephonic notice. Plaintiff gave no notice prior to f their commencement of interstate operation on May 4, 1976 because they feared defandants would exercise their right to disconnect.

Each defendant has indicated that it will engage in an j interstate mode of operation when there is shown t.o be 3

advantage to the customers of the defendants that outweigh's t

i the advantages of the present intrastate system of operation.

! There is considerable evidence of each defendant's past and present efforts to evaluate the beniifies and costs of an interstate mode of operation. In fact, one of plaintiffs'

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own witnesses, Mr. Arey, was retained by TESCO and its affiliates in 1966 to study interconnection with SWPP, and he concluded that TESCO and all the other members of TIS l ~ would be better off by operating on an intrastate basis. In contrast to plaintiffs' assertion that the defendants have l

acted unreasonably in operating intrastate, Mr. hay testified 4

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that it would not have been unreasonable for defendants to continua intrastate operations based on the results of his . .

study.

The wisdom of TESCO's deteruf nation to avoid synchronous interstate operations is illustrated repeatedly by the failure of all attempts by the Texas co=panies to operate in synchronism with the vast electrical system outside Texas.

Synchronous operation of the Texas utilities and interstate utilities during 1942 to 1945 resulted in numerous system s

outages both in Texas and in other states. Some of these outages occurred because of trouble as far away as Alaba=a, Tennessee and Mississippi. Synchronous operations of the Texas utilities in interstate com:erce during 1942 to 1945 was unsatisfactory and was tolerated only because of the emergencies of World War II.

In 1957, HLP and GSU tested whether their systems could operate in synchronism. The resulting electrical disturbances

( were so severe that the test had to be abandoned. In 1968, the FPC encouraged HLP, TPL and GSU to test snychronous operations through the CSU-HLP Huf5=an tie. The 1968 cast also proved totally unacceptable and was abandoned.

From August 28, 1976 to January 22, 1977, plaintiffs attempted to operate in synchronism with the SWPP. Such operations resulted in serious reliability problems and at least nine system separations,' t-o of which occurred because of generation difficulties in Mexico. Moreover, CSW has publically acknowledged in a prospectus filed with the SEC that the TIS, including WTU and CPL, cannot operate in synchronism with PSO and SWEPCO and other members of SWPP without critical operating proble=s.

TESCO and HLP have stated that while they believe that l intrastate operation is in their best interest and 'a the l best interest of their customers, if it appeared advantageous to commence synchronous operation with SWPP, they would be among the first to undertake that mode of operation. Until such ti=e as there is advantage to their custcmers from interstate operation, defendants prefer to avoid the cost of

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regulation which would inevitably result from interstate operation. This preference can hardly be regarded as unreasonabl%

since defendants obviously received no benefits from any such regulation. Indeed, plaintiffs' economic expert admitted that it was in defendants' own best interest to avoid FERC regulations.

Events I.eading to Filing of Plaintiffs' Cecolaint Both plaintiffs, WTU and CPL, toic the Depart =ent of Justice in 1973 that they did not want to interconnect with

/ S*4PP because the interconnection would degrade the reliability of TIS. Moreover, plaintiffs have ad=itted that intrastate operation was in their best interest until 1974 Plaintiffs' change in attitude in 1974 coincides with the date of the filing of the complaint against plaintiffs' parent holding ce=pany, CS'4, in the Securites and Exchange Cot =:lission (SEC).

Five months after WTU and CPL advised the Depart =ent of b Justice that they did not wish to interconnect with PSO and other me=bers of S*4PP and after advising the Department of Justice of their continued desire to limit their business to the State of Texas and intrastate cot =erce, a complaint was filed with the SEC alleging that CSW was not a single integrated electric utility system within the meaning of the 1935 Act.

In response to this petition, CSW hired Power Technologies, Inc. (PTI) to perform a study concerning alternate modes of integrating the holding company. In the su==er of 1974, Mr.

S.D. Phillips, Jr. , chairman of the board of CSW, invited TU to participate in the study. Mr. Phillips infor=ed TU that the study would include modes of operation which integrated the CSW companies with synchronous operation with the SWPP.

At such meeting the chief executive officer of CSW told the chief executive officer of TU that if he did not cooperate in proceeding with synchronous operation between ERCOT and SWPP, CSW would force such mode of operation upon ERCOT companies, including TESCO and ELP, against their will.

TU declined to participate in the study commissioned by

CSW because the CSW study was limited to en-dning how best t

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to integrate the CSW co=panies for the purpose of co= plying

. with the 1935 act and weul:1 not include examination of .

whether ERCOT should be connected with SWPP.

The preli=inary results of the PTI study were presented to the CSW board of directors at a meeting on October 16, 1975. Ac'that meeting, CWS, on.the advice of its counsel, adopted a, policy to integrate its affairs by causing its four subsidiaries to operate in synchronism while at the same ti=a =aintaining all interconnections with non-affiliated D companies, including TESCO and HLP. At the time such decision was made by CSW, no reliability studies had been conducted, the econe=ic study was not co=plete, and no effort was made to evaluate the i= pact of synchronous operation on other companies in SWPP or TIS /ERCOT.

Following co=pletion of the PTI report, it was personally delivered by CSW to TU. Again, CSW advised TU that TU would eicher cooperate in the implementation of snychronous operation

( vith SWPP, or it would be forced upon TU against its will.

At no time did k"rU or CPL or their parent, CSW, approach TESCO or HLP on the basis of conducting studies to deter =ine the best mods of operation for electric utility syste=s in Texas or elsewhere; but on the contrary, continuously insisted that synchronous operation would be instituted whether it was in their best interest or not.

In late Dece=ber, 1975, CSW's chair =an of the board delivered a copy of the PTI report to the president of HLP, inviting HLP's cooperation in the i=plementation by CSW of a Mode 4 operation, but stated that CSW was cocnitted to an interstate mode of operation and CSW would force HLP's cooperation if HLP's coopers : ion was not voluntarily forthcoming.

On Der d er 31, 1975, CtW filed the PTI report with the SEC and advised the SEC that it was ce==itted to pro-caeding with the integration of its four subsidiaries by sewing together the electric syste=s comprising ERCOT and i l

SW?P. CSW advised the SEC that Mode 4, the preferred mode of operation, would per=it the CSW ce=panies to utilize the j transmission systen of other me=ber companies of'ERCOT, l

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which, in turn, would integrate the four CSW ce=panies in a m-ar required by the 1935 act. CSW further advised the-  ;

SEC on December 31, 1975, that if defendants did not cooperate in such an interconnection, other. options for securing the necessary cooperation would be considered. This representation was consistent with the other threats made by CSW against the defendants prior to such stay. Prior to Dece=ber 31, 1975, the plaintiffs never advocated nor did they desire to operate in interstate coc=erce in synchronis= with SWPP.

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Prior to the attack on CSW's holding ce=pany status, neither WIU nor CFL atta=pted to or desired to undertake synchreneus operations with PSO or other =e=bers of the SWPP.

For 40 years prior to Dece=ber 31, 1975. WIU, CPL and CSW believed that the nature of their operations, including the maintenance by WTU of its northern division electrically isolated fro = the southern division, was in their best interest and in the best interest of their customers. On

( January 30, 1976, the SEC ordered that an evidentiary hearing be held to con,ider, a=ong other things, whether the electric

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utility facilities of the subsidiaries of CSW were capable of being economically operated as a single integrated and coordinated syste= within the meaning of the 1935 Act. TU and HLP intervened in the SEC proceeding announced by the January 30, 1976 notice, and a pretrial hearing was scheduled for May 12, 1976. ,

TESCO advised the SEC that the mode of operation proposed by CSW would radically alter the mode of operation of TU and j the other me=bers of TIS and would pose a threat to reliability of service and would i= pose unreasonable and uneconomic burdens upon TU and TIS customers and investors. Such a change in = ode of operation would result in an unjustifiable risk to such customers and investors. TESCO further advised the SEC that it appeared that CSW's proposal was being made merely as a sche =a by CSV to save its holding ce=,any.

CSW e= barked on a secret and clandestine maneuver on May 4, 1976 to save its holding co=pany status by utilizing the facilities of the defendants against their w'ill. At a

• • 34 secret meeting of CS'4 executives and attorneys in the latter

,part of April,1976, Cb4S's vice president and chief engineer ,

memoralized a legal plan to save CS*J's holding company and confirmed the lace. of any other motivation for the action subsequently taken on May 4, 1976.

In the darkness of night on May 4, 1976, m perfor=ed a midnight wiring of electrical circuits charged with 69,000 volts of electricity between m and PSO, a procedure which .

placed M, and therefore all members of T!S and IRCOT, in p interstate commerce. At trial M attempted to justify the establishment of this new radial line as part of its plan to implement Mode 4 operation. In fact, plaintiffs' own witnesses testified that the existence of this radial line was not in any way cente= plated nor a necessary part of any plan to implement Mode 4 and although sema of plaintiffs' witnesses stated that the radial line was necessary in order to insure reliable electric service to the c+ aticies in Oklaho=a, I r find that the evidence is to the contrary and that the t

midnight wiring was done without any legiti= ate business purpose. By installing the radial <line, often referred to as the " midnight wiring", m maliciously and willfully violated its long standing agreement with TESCO by failing to notify TESCO of the commence =ent of interstate operation and for the purpose of requiring TESCO and HLP to operate in snychronism with Sk'PP. This is also evidenced by the fact that this suit was filed on May 3, 1976, along with an application for a temporary restraining order, in an atta=pt to force the defendants into interstate operations without the defendants' voluntary consent.

At the time of the midnight wiring, defendants had ,

evaluated the PTI report. Upon being notified of the midnight wiring, TESCO concluded independently that it was done in furtherance of a plan to force the synchronous interconnection of ERCOT and Sk*PP against their will and in furtherance of the threats earlier made. TESCO had concluded that the implementation of Modai 4 would downgrade its reliability and would cost a significant a=ount of money witit no corresponding

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1 benefits to it or its customers. Based upon TESCO's prior evaluation of the . mode of operation which was in its best interest and the best interest of its customers, the threats made, the purpose of the PTI study, and its knowledge with

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respect to the adverse effects of interconnected operation gained over a long period of ti=e, it had no reasonable alternative other than to disconnect from the plaintiff and from other electric utilities if it were going to be in a ,

postion of exercising its own choice as to the best mode of operation in the future. ELP had also reached the same conclusion, although independent of TESCO. Both defendants had to act quickly after the midnight witting of m y 4, 1976 occurred if they were to preserve their intrastate mode of operation. The longer the defendants remain interconnected with m , with the plaintiffs, and other utilities which were connected in interstate com=arce, the more likely it would be that the TPC would assert jurisdiction over the .

s companies.

L In severing connection with plaintiffs on b y 4, 1976, '

defendants acted independently and defensively in pursuing the only actica ihat would allow them to preserve their ability to decide for themselves the manner in which they would conduct their operations. The purpose of the actions of m and PSO on hy 4,1976 was to force TESCO and HLP into interstate commerce and subject TESCO and HLP to federal regulation against their will. The motive behind the actions of M and PSO on hy 4,1976 was to preserve CS'J's corporate structure and CS*J's status as a regulated holding company under the 1935 act. Any economic benefit realized by M as a result of the establishment of the radial feed into Okl'ahoma on b y 4, 1976 was minimal at best, and was not a justification in itself for establishing the radial tie.

THE COURT'S DECISION The Court has spent the last eight weeks reviewing both the record in this case, which is over 3,500 pages of testi=eny and about 1,000 exhibits, the court's notes and recollections, and the law that applies to this case, and I think I have a

J8 pretty fair understanding of what this case is all about.

, Plaintiffs have advanced a number of thecries of recovery, _ ,

and there is a lot of evidence, so from that standpoint it is a complicated case, but I think many of the key questions in this case are simply questions of law.

This case, as it.has been presented over the past two

and one-half years, really boils down to a single, preliminary question of law, that is, whether or not it is a violation

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of $ 1 of the Sherman Act for an electric utility to exercise the freedom of choice provided by Congress in 5 201(b) of the Federal Power Act (16 U.S.C. 5 824(b)) and decide to confine its facilities and operations solely within a single state. Plaintiffs have made much of the argument that this is a group boycott, that they are not talking about just one electric stility deciding to operate intrastate coccerce,

) , but a group of utilities, and the defendants' concerted

) action means that interstate utilities cannot connect to

) them,ipecifically that the plaintiffs cannot connect to the defendants and remain in interstate commerce.

In this context I do not perceive a difference between

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i one utility deciding to operate intrastate, or a group of j utilities, independently or even in concert, deciding to operate intrastate. Congress must have been aware of the I

unique characteristics of the electric utility industry at the time it adopted the Federal Power Act, and must have been aware that the operation ef a totally intrastate electric utility system could have potential antitrust considerations.

$l 4

Congress gave the electric utilities a choice: intrastate i

operation or interstate operation. If taking advantage of

, the intrastate option violates the Sherman Act, then the

! Provision of :he Federal Power Act becomes meaningless.

Congress can rewrite the Federal Power Act and eliminate S

, that provision; I cannot. Therefore, I do not think that the actions of the defendants violate the Sherman Act, 5 1.

I want to emphasize one factor which I took into account in evaluating the credibility of the witnesses, which I must j , do in this case as the trier of fact. I mentione'd that this

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case turns pri=arily on questions of law, but I cerainly recognize that there are significant factual issues in this -

case",particharlythetestimonyconcerningthealleged i

economic savings and increased reliability to CS'J if Mode 4 is imple=ented. I think it is a fair state =ent of the law that when a court considers an antitrust case, the focus of the court's inquiries should be upon the actions of the defendants, not the plaintiffs. Stated another way, for purposes of determining whether or not the defendants have violated the Sher =an Act, the motive of the' plaintiffs in bringing the suit is irrelevant to a determination of the plaintiffs' claim.

There has been a lot of testi=eny in this case concerning CS'J and the plaintiffs' bad motives in bringing this case, and I think that I should make clear that I have not considered that testimony in making my deter =ination on the =erits. On the other hand, I do think that that testi=ony can be relevant

_ y to my evaluation of the credibility of the witnesses, particularly when that testi=eny is essential to plaintiffs' factual support for the Sherman Act clai=s; such as the testi=eny regarding co= petition and the alleged savings to the plaintiffs from Mode 4 operation. In the sa=e regard, I think I must carefully consider testi=eny that was given in docunents j that were prepared after the SEC challenged CS'4's holding company status and after the May 4, 1976 wiring into Oklahoma.

Certainly the plaintiffs' alleged motive in bringing this case merely to integrate CS'J's holding ce=pany and avoid divestiture is not conclusive in my evaluation of the credibility of certain witnesses, but I think that the defendants have I a= ply demonstrated in this' record, as I have found earlier in this ophien, that the plaintiffs had this motive available to them, and used it, other than the motives plaintiffs have advanced, for filing this lawsuit, and, more particularly, for developing testimony that would support the alleged Sher =an Act violations.

Groue$ovcotrs

. Concerted refusals to deal, or " group boycotts", are O

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