FTC Perspectives on Competition Policy and Enforcement Initiatives in Electric Power

The Conference on The New Rules of the Game for Electric Power: Antitrust & Anticompetitive Behavior.

Washington, D.C.

Date:
By: 
William J. Baer, Former Director

Good morning. It is a pleasure to be here. I'd like to start off by thanking Andy Strenio for inviting me to participate in this program. I was happy to accept, not only because he is an old friend and a former FTC Commissioner, but because the issues that will be discussed here are tremendously important. I don't want to be overly dramatic, but the electric power industry is huge, not only in terms of its annual revenues of approximately $200 billion (and total capital investment of around $700 billion, or 10% of the US total), but in terms of its impact on virtually every facet of life in this country. The organizers of this conference have put together a very interesting program that will help move us along the path of deregulation to an era of competitive electric power and the consumer benefits we would expect to follow -- lower prices, consumer choice and increased innovation.

I was asked to speak on "the FTC's perspectives on antitrust enforcement in an era of electric power deregulation." That is a pretty broad assignment. Since the following segments of this conference will get into some of the details of the competition issues that are likely to arise, I will use my assigned topic as a license to paint with a broad brush. Before going any further, I should note the standard caveat that my remarks today are my own, and do not necessarily reflect the views of the Commission or any Commissioner.

Much of what I will say this morning necessarily must be prospective, because we really are entering a new frontier. The electric power industry for many years has consisted of a collection of heavily regulated, highly integrated local monopolies. There isn't a great deal of history of antitrust enforcement in the electric power field simply because there wasn't much room for competition in the first place. The former natural monopoly characteristics of the industry resulted in regulation rather than a competitive market system, so antitrust had only a limited role.

The most notable exception to that, however, is the Supreme Court's 1973 decision in Otter Tail.(1) In that case the Supreme Court held that Otter Tail Power, a wholesale supplier of electricity, violated Section 2 of the Sherman Act when it refused both to sell or "wheel" power to municipal power systems that sought to take the place of Otter Tail's expired retail distribution franchises. The Court affirmed the district court's finding that Otter Tail had "a strategic dominance in the transmission of power in most of its service area," and that it had used this dominance to foreclose potential entrants into the retail area from obtaining electric power from outside sources of supply.(2) The Court's decision was prescient, because the open access issues that confront us today are the same issues that were central to that case.

The natural monopoly characteristics of the industry have changed somewhat, in part as a result of technological change at the power generating level. It is now possible to build and operate competitive generating units at a smaller scale, which has opened up new competitive opportunities in power generation. In addition, there has been some creative thinking going on to loosen bottlenecks at the transmission and distribution stages, so the output of these new generating units can reach consumers. This is still a work in progress, and there are some tremendously complex issues involved.

What role should antitrust play in all this? Should it have a different role than it does in non-regulated industries? Should the rules be applied more firmly to provide greater protection to the emergence of competition, or should we stay our hand to some extent to let the market take shape on its own accord? Those are basic questions I would like to explore with you this morning, along with a discussion of the role the FTC has been playing, and a look at what we think will be some of the more prominent issues from an antitrust perspective.

I will start with a threshold issue -- whether the antitrust rules in a deregulatory context should be different from those applied in other industries.

Is There a Need for Different Antitrust Rules in a Deregulatory Environment?

My answer to this question is "no" -- new antitrust rules are not needed. I am a strong believer in the principle that the same antitrust laws should apply to everyone unless there is a compelling reason to do something differently. One of the strengths of the antitrust laws is that they are industry-neutral. That makes it easier to stay focused on the basic economic principles and values that underlie the antitrust laws and their application, and it avoids a crazy quiltwork of laws that would be difficult to administer and even more difficult to rationalize.

That does not mean that the antitrust laws are applied inflexibly. On the contrary, another strength of the antitrust laws is that they are capable of being applied to a wide variety of contexts, from basic industries to health care and innovation markets. The basic principles remain constant, but the rules are flexible enough to be applied to widely different factual situations. I think that has contributed to the enduring quality of the antitrust laws. Importantly, however, although the laws themselves have been modified rather infrequently, interpretations of them have changed as the business environment and economic learning have evolved. That enables us to adapt with the times and apply basic antitrust principles to new settings. As a result, there has not been a need to change the antitrust rules for other industries that are undergoing, or have already undergone, deregulation, such as telecommunications and natural gas, and I do not see a need for different rules for electric power.

There are, however, some observations that I would like to share about the role of antitrust in a deregulatory environment, based in part on experiences in other industries that have undergone deregulation or are still in the process.

General Observations About Antitrust in a Deregulatory Environment

Observation 1: Antitrust is an important complement to the deregulation process.

Antitrust is an important complement to the deregulation process for at least two reasons. First, antitrust and antitrust economics can play an important policy role in shaping deregulatory decisions. These twin disciplines have a lot to offer in terms of analyzing how alternative deregulatory mechanisms can affect the ability and incentives of firms to compete. Antitrust therefore should have a significant voice in the design of deregulatory mechanisms, because they can affect the competitive landscape down the road.

The electric power restructuring experience in the U.K. is a good example of that. There, restructuring led to a market power problem at the power generation level. The regulators separated transmission from generation, but the former state-owned conventional generating assets were divided between only two private companies (nuclear generation remained with the government). Moreover, although there were ten generator firms in the market, the two companies that took over the government's conventional plants became the price-setters because they operated the middle cost plants that set the marginal price.(3) In addition, some of those plants had strategic locations on the grid and, from time to time, were required to run "for reliability."(4) Therefore, they had some leverage and naturally submitted high bids.(5) Finally, some portions of the grid were capacity-constrained during some load conditions, which created local monopoly conditions at those times, and again resulted in higher than competitive bids.(6)

To address those kinds of concerns in the United States, the FTC and the Antitrust Division have been offering policy advice on regulatory reforms relating to electric power. For example, FTC staff submitted comments in the FERC proceeding that led to Order No. 888 regarding wholesale competition.(7) We recommended an operational unbundling approach to the separation of power generation from transmission, to separate control over those two parts of the business. FERC instead adopted a functional unbundling approach, which seeks to achieve functional separation through rules. I think it will be interesting to see how it works out.

Later, in FERC's rulemaking proceeding on revisions to its merger evaluation procedures, FTC staff advocated the adoption of the analytical framework of the DOJ/FTC 1992 Horizontal Merger Guidelines.(8) We're happy to see that FERC essentially adopted our framework, details and all; the only difference is that FERC added a few wrinkles of its own to adapt the guidelines to the FERC regulatory framework.

Much of the action in deregulation is occurring at the state level. So, where asked, FTC staff has also provided comments to various states on the virtues of competition in electric power.(9) We welcome those opportunities.

Antitrust also needs to be especially watchful from an enforcement perspective during the transition to a deregulated environment. It is gospel that the antitrust laws are important to maintaining a competitive marketplace. If that is true in unregulated markets, it is especially true when an industry is required to change from a state of local monopolies to an openly competitive environment. Rather than trying to prevent a workably competitive market from becoming less competitive, which is the more common task of antitrust enforcers, in a deregulatory environment we very likely are faced with an industry that is starting from positions of market power. Those who have power and control, whether it be in business or politics, seldom are anxious to give it up. Some in the industry may resist change, either through opposition to the most competitive forms of deregulatory mechanisms, or through marketplace conduct.

The antitrust agencies face some challenges in dealing with long-standing market power, because the antitrust laws were not meant to address monopoly power that is the result of "innocent" phenomena such as economies of scale, and mergers that may have been approved long ago under a regulatory regime likely would be difficult to unravel, if they could be challenged at all. Those kinds of situations are perhaps better dealt with through regulatory reform, with antitrust doing what it does best -- focusing on anticompetitive conduct or behavior.

Therefore, we have to be vigilant both in designing the appropriate deregulatory mechanisms, and in enforcing the antitrust laws against private conduct that would result in less rather than more competition. That means we have to take a close look at mergers between actual or potential competitors, exclusionary behavior, and other kinds of conduct may disadvantage rivals unreasonably.

Let me give you an example from the natural gas industry. There, deregulation of interstate gas pipelines by FERC Order No. 636 opened the door for competition in sales of gas to utilities and industrial customers. Order 636 required interstate pipelines to unbundle their services -- gas purchasing, transportation and storage. Interstate pipelines now sell only transportation, not the gas itself. That is analogous to the effect of FERC Order No. 888 regarding open access to electric power transmission. One consequence of the deregulatory efforts in natural gas is that industrial customers may now have the option of bypassing their local utility; they can buy gas from other sources and contract to have it transported to their facility. A strategic merger can put up a roadblock to that process, as it threatened to do in the Salt Lake City natural gas market two years ago.

There, Questar Corporation, a vertically integrated producer, transporter and retailer of natural gas, owned the only pipeline serving Salt Lake City. It sought to acquire a 50% interest in Kern River Transmission Company, which operated another pipeline in the general vicinity. Kern River was planning to construct a lateral pipeline to serve industrial customers in competition Questar. Kern River had been soliciting customers, and it was already having an effect on pricing, as Questar lowered its pricing to certain customers to discourage switchovers. Questar's solution to this competitive threat was not surprising -- it sought to buy a major piece of the prospective competitor.

It was clear that the merger would take away the procompetitive benefits of new entry. Questar offered to settle the matter, but the Commission rejected the proposed settlement because it contained pricing provisions that were too regulatory for our tastes and it would not have restored the incentives for the two firms to continue competing vigorously for customers. The FTC therefore challenged the transaction under the "potential competition" theory, and the deal was abandoned.(10) We need to watch for similar kinds of transactions in the electric power industry that may nip competition in the bud.

Observation 2: The transition to a more competitive environment can be complicated by a mix of regulation and the involvement of several different regulatory bodies, as well as the antitrust agencies.

As all of you well realize, the electric power industry is faced with regulation at both the federal and state levels, and the involvement of FERC, state public utility commissions, and the federal antitrust agencies. My point is not to criticize this regulatory framework -- on the contrary, each part has a legitimate interest in the process -- but the complexity of the framework can have an important implication for the transition to a competitive environment. The transition may not be uniform or universal, and market participants may find themselves subject to inconsistent requirements. Particularly given the role of the individual states in regulation, some participants may be subject to market forces while others are still regulated, or different participants may be subject to different regulatory rules. For example, potential anticompetitive behavior may be monitored by FERC, state public utility commissions, and/or the federal antitrust agencies, depending on the pace and mix of deregulatory efforts at the state and federal levels. Among the many considerations in working through the deregulation process, we should keep in mind the potential competitive implications of inconsistent regulatory requirements.

Observation 3: The transition to a competitive environment may take longer than some may expect.

It comes as no surprise that the deregulation of a heavily regulated industry is complex and takes time. Several implications flow from that. First, as I have already noted, antitrust must be particularly vigilant during the transition, until competitive forces are firmly rooted. Second, care should be taken not to eliminate some kinds of regulation prematurely, before competitive forces are firmly established. An example that comes to mind is cable television deregulation. Rates were deregulated with the expectation that emerging new technologies would supplant regulation with competition. That didn't happen as rapidly as expected, and many consumers are now complaining about cable rates again. Third, for the same reason, we should be careful about being persuaded that antitrust enforcement is not needed because new competition or new technologies are just around the corner and will obviate any competitive concerns. Again, that is an argument we frequently hear in the cable industry, but the facts from our investigations to date suggest that alternative technologies still are not an effective constraint on cable TV rates.

A recent FTC investigation provides a reality check in this regard. The case involved a proposed merger of two cable operators in an "overbuild" market. That is a situation where the local government has franchised two cable operators to serve the area. The merger would have resulted in a monopoly, which is the situation in most areas of the country since most local jurisdictions license only one cable franchise. In fact, in the county where the merger was to take place, an overbuild was authorized in one part of the county but not the other. That enabled us to make a side-by-side comparison of the two markets. We found substantial competitive differences between the two markets: lower monthly price for cable service in the overbuild area, and competition through installation discounts and service enhancements, such as additional channels and system upgrades in the overbuild area. In addition, the subscriber penetration rate in the overbuild area was substantially higher (90%) than in an adjacent non-overbuild area (60%), which is consistent with lower price and better service. This evidence indicated that direct broadcast satellite (DBS) and newer forms of multi-channel video delivery (such as telco entry) were not yet an adequate constraint on the ability of the merged firm to increase prices.

Cases such as that illustrate the risk of relying too heavily on innovation, technological change and new entry to solve competitive problems. Under the Merger Guidelines, we look to see what might happen within two years after a merger. Sometimes a lot can happen in two years, but some examples show that predictions are not always borne out.

Observation 4: Antitrust does not have all the answers.

There are some things that antitrust is not comfortable in addressing. An example is the open access requirement that FERC addressed in Order 888. Antitrust does not often impose an access requirement because it has obvious regulatory overtones and it involves difficult issues, such as the terms of access, and very possibly a need for continuing oversight, that might be handled more effectively by a regulatory agency rather than an antitrust enforcement agency.

There are also some things antitrust generally cannot address. For example, regulatory bodies may have non-competition policy goals that warrant consideration in the transition to a competitive environment, such as universal lifeline service(11) and environmental protection. We might be able to take account of those kinds of factors in choosing between alternative remedies that are otherwise suitable to the task, but they are outside the scope of the antitrust laws when determining there is a law violation in the first place. Therefore, some continuing regulation or other special provisions may be necessary to ensure that those policies are served.

Observation 5: Continued antitrust vigilance is needed after deregulation.


We should not be complacent once a market is deregulated and access is opened up. Deregulation does not necessarily bring about a fully competitive market. That should not come as a surprise, but it is helpful to remind ourselves of that basic truth as we go about the process of deregulation. A good example comes from the airline industry. In the 1980's, following deregulation, the Department of Transportation permitted a number of airline mergers to take place, some against the advice of the Antitrust Division, on the belief that entry was relatively easy and that the prospect of new entry would keep ticket prices competitive. This analysis was based on the so-called "contestable markets" theory, which was much in vogue at the time. It is a valid theory, but it must be carefully applied. In some of those cases the DOT might have overlooked a simple but important fact -- an airline needs landing slots in order to serve an airport, and if the incumbents have those landing slots locked up, the market isn't really contestable. As a result, we pay higher ticket prices in traveling between some city pairs than other, equally distant city pairs, and at least some of that difference seems to be attributable to market concentration.

Let me turn to another subject that appears at the crossroad of antitrust and regulation (or deregulation) -- the choice of remedial approaches to address a competitive problem.

Observation 6: There are significant differences in institutional approaches to the choice of remedies.

As we enter an era of competition in at least two sectors of the electric power industry -- generation and retail marketing -- we should think hard about the tools we should use to solve competitive problems and maintain a competitive marketplace. The basic choice is between a structural approach to remedies, which is the antitrust preference, and a behavioral approach that seeks to govern conduct through the use of rules, which is more typical of a regulatory regime. That choice is likely to arise most prominently in connection with access to wholesale power distribution grids and with mergers.

The structural approach focuses on maintaining an industry structure that is conducive to competition. Usually, that means maintaining or restoring the independence of the relevant economic actors. In that situation, the firms' incentives are to advance the interests of their separate businesses, and the opportunities for engaging in strategic interdependent behavior are lessened. Thus, in mergers the strongly preferred remedy is divestiture or, if necessary, stopping the transaction altogether. There are, of course, some exceptions, but they are applied advisedly.(12) The regulatory approach to competitive problems, on the other hand, usually is to use rules to govern conduct, and so a regulatory agency looking at the same merger might permit the transaction but impose some conduct requirements. Similar differences in approach can arise in the context of regulatory restructuring of an industry.

Let me use a hypothetical to show why the choice of remedy is important. Consider an integrated power transmission monopolist that operates its own generating facilities. The transmission market is regulated, but the generation market is not regulated because it can be workably competitive, provided that access to transmission functions well. The integrated firm can earn higher profits if it can evade regulatory constraints at the transmission level, and it can do that by shifting costs between the regulated and unregulated markets, or by favoring its own generating facilities and discriminating against its competitors in access to transmission.(13) The FTC has addressed this kind of competitive concern in the natural gas industry, where it ordered divestiture of a pipeline to prevent a firm from taking advantage of vertical relationships with its merger partner to evade rate-of-return regulation. In that case, Occidental Petroleum Corp.,(14) the vertical integration through merger would have enabled the owner of unregulated gas reserves to inflate the price of its gas since the acquired pipeline was the sole supplier to a major city.

A behavioral approach to addressing this kind of competitive problem has several drawbacks. First, it does not eliminate the incentive and opportunity to engage in exclusionary behavior. Rules can try to limit the opportunity, but few rules are invulnerable to evasion. Second, detection of violations can be very difficult. For example, discrimination in access could take the form of a subtle reduction in quality of service, whose effects could be difficult to identify and measure. Third, behavioral rules can require long-term monitoring of compliance, which can be a costly process. A structural approach minimizes the cost of monitoring compliance with the order. With a divestiture order, for example, that usually is a short-term requirement because the principal monitoring function is to make sure that the divestiture takes place in the manner required by the order. Fourth, it may be difficult to know whether we have selected the right rules. Even a simple cease-and-desist order, which is commonly used in antitrust cases, can be difficult to frame, because we do not want to prohibit too little or too much. More complex orders, especially those that try to guide conduct through affirmative requirements, can be more difficult to frame properly.

These problems are illustrated by the consent decree that settled the AT&T monopolization case, where the parties used a combination of divestiture and conduct requirements. That order required years of costly oversight and litigation to interpret the order and review applications for exceptions from its constraints. More recently, the rules regarding access to local exchange facilities, to open up competition in local telephone service, are another example of the complexities and uncertain success of the regulatory approach to shaping the competitive playing field.

We also recognize, however, that a purely structural approach to certain problems, requiring a complete separation of business functions, may be costly or difficult to implement, and it may require a sacrifice of integrative efficiencies. That is why the FTC's Bureau of Economics recommended an "operational unbundling" approach to the separation of power generation from transmission services.(15) The Bureau described this as "institutional arrangements, short of divestiture, that would separate operation of the transmission grid and access to it from economic interests in generation."(16) One way of doing that is to have an Independent System Operator ("ISO") take over operation of the transmission grid. Operational unbundling is a middle ground between complete separation by ownership, and total reliance on behavioral rules. The Bureau of Economics believes that operational unbundling would entail lower costs of monitoring and enforcement than behavioral rules, and that it would be less costly to implement than divestiture because only operation, not ownership, would be structurally separated. FERC, as you know, opted to require only a "functional unbundling" approach, which relies on rules. However, it encouraged utilities to consider ISOs as an alternative.

California has been at the forefront in adopting the ISO approach. FERC recently granted conditional approval to the operation of a California-based ISO,(17) and we will be watching with interest to see how that particular system works out.

With those observations in mind, where we go from here?

The Hot List

Speaking broadly, antitrust is generally concerned with three kinds of marketplace behavior: mergers that may lessen competition; anticompetitive agreements; and exclusionary conduct. Let me briefly talk about how these three areas relate to electric power.

Mergers

I am sure all of you are aware of the antitrust agencies' strong commitment to merger enforcement. That is a major part of our mission, because mergers can harm competition, and consumers, in a variety of ways. First, a merger might enable a firm to increase prices, or cause other harm, unilaterally. Second, a merger might increase the likelihood of future anticompetitive conduct such as collusion or exclusionary behavior. Those kinds of conduct may themselves violate the antitrust laws, but Section 7 of the Clayton Act, the principal antitrust law governing mergers, requires that those kinds of consequences be stopped in their incipiency. Third, a merger might enable competitors to coordinate their actions in ways that might not violate the antitrust laws but nonetheless are anticompetitive. Of particular relevance to the electric power industry, a merger can negate the kind of structural change that deregulation is seeking to bring about. Merger law is not concerned simply about structural change, but it can have serious implications for the kinds of competitive effects I have just mentioned.

There has been a great deal of merger activity in the electric power industry in the last couple of years, and I expect that will continue. Mergers are common in industries in transition as firms seek to restructure their operations, seek strategic alliances, or reposition themselves for a new competitive environment. Experience suggests that most mergers do not raise major competitive concerns and may well be procompetitive; our job is to identify and take action against those that are likely anticompetitive.

Our role in electric power to date has been mostly that of advocate and advisor, both because of the relatively early stage of deregulation in this industry and because of the statutory role of FERC in reviewing mergers of utilities engaged in the interstate sale and transmission of electricity. Under section 203 the Federal Power Act,(18) FERC reviews mergers of interstate utilities under a public interest standard, which includes but is not limited to antitrust considerations. The antitrust agencies are also empowered to enforce section 7 of the Clayton Act against anticompetitive utility mergers, but there are some jurisdictional complexities. Consequently, FERC has had the leading role in reviewing mergers, and the antitrust agencies may take an advocacy role in FERC proceedings.

What kinds of mergers would be of concern to us? There are several kinds, but as with mergers in general, out of the many that we review, relatively few will raise significant concerns.

Horizontal mergers

Horizontal mergers, of course, are the staple of merger enforcement, and that may well be the case in electric power. A merger between generating firms may have the potential to create market power that could be exercised by withholding capacity in order to drive up rates. Open access seems likely to lessen such concerns, but there still may be circumstances in which suppliers could exercise market power.(19) The basic analytical framework of the DOJ/FTC horizontal merger guidelines would apply, but the analysis of such mergers is anything but straightforward. As usual, the devil is in the details. Identifying the relevant geographic market -- or identifying the firms that can supply that market -- can be particularly difficult. Electricity can be transported long distances, but getting it to its destination in a competitively viable way through a wholesale power grid is another matter. Others in this program probably will talk about the technical and economic complexities, but they are the kinds of issues that some of our economists would probably love to tackle.

At the local distribution level, utility mergers historically have not been a concern because they have been local monopolies, so a merger would not eliminate competition. The competitive dynamic will change with the entry of independent power marketers as states loosen the local monopolies. Whether a merger at that level -- e.g., between a local utility and an independent retail marketer -- might be problematic under the Clayton Act is uncertain. We have not yet had an occasion to review such a merger. A big question is the ease of entry. If it is a simple matter for another independent marketer to step in, a competitive concern is much less likely.

Another kind of merger at the retail level, between an electric utility and a natural gas utility, potentially could raise concerns under certain circumstances -- i.e., where the two energy sources are competitive substitutes for certain applications such as residential cooking, water heating or space heating or cooling.(20) We have reviewed a few mergers of that type over the years, but there have been no enforcement actions to date.

Potential competition mergers

Another concern is the elimination of a potential competitor through merger. If the market is already highly concentrated and the potential competitor is one of only a few firms likely to enter the market, the merger could raise serious concerns under the Clayton Act. A good example is the Questar/Kern River transaction that the FTC challenged in the natural gas industry.(21)

Vertical mergers

A so-called "convergence merger" between a power generator and a fuel supplier, such as a supplier of natural gas or coal for its generating facilities, could raise other interesting questions. In antitrust jargon, this would be characterized as a vertical merger. Although the companies are not competitors, the transaction could raise several competitive concerns.

First, if the generating company acquires market power over the supply of fuel to its generating competitors or potential competitors, it would be able to raise their input costs or restrict their supplies and put them at a competitive disadvantage. In turn, the now-vertically integrated generating company could either raise the price of its electricity output or sell more of its own output since its competitors now have higher costs. Thus, convergence mergers can distort the market in two ways: customers will pay higher prices, which can distort consumer choices, and the acquiring company can favor its own generating facilities while other, more efficient plants may stand idle.(22) This is a familiar concern in vertical mergers that result in market power over an important input. In fact, it is a concern that underlies Order No. 888, since transmission services are a necessary input to the sale of wholesale power -- a generator that controls transmission can control the relevant market for wholesale power. The FTC has addressed such concerns in natural gas, video programming and distribution, and in a number of other industries, and FERC found the Enova/Pacific Enterprises merger problematic for this reason.(23) Enova involved the acquisition of a natural gas transmission and distribution company by an electric power generator.

Second, under a theory discussed in a recent speech by my colleague Jonathan Baker, the acquisition may give the generating company access to proprietary information about its competitors' costs.(24) Since fuel costs are a substantial portion of generating costs, knowledge of competitors' fuel costs could give the firm an advantage in bidding situations. As explained by Jon Baker, absent good information about its rivals' costs, the firm may price its bids close to its own costs. With proprietary information about the costs of other low-cost competitors, the acquiring firm is more likely to raise its bids, setting them just slightly below its estimates of the competitors' bids. In other words, with access to proprietary information, the firm could increase its price with confidence that it is still likely to win the bidding.

Third, the acquisition of market power over an unregulated input could enable a vertically integrated utility to evade rate regulation at the retail distribution level. The retail rate may still be controlled through cost of service regulation, but the input costs at the generating level could be inflated and passed on to consumers at the retail level.

FERC's order in the Enova/Pacific Enterprises matter addressed the competitive concerns under the first (raising rivals' costs) theory, but left the implementation of remedies up to the California Public Utilities Commission. FERC conditionally approved the merger subject to California's adoption of three remedial mechanisms to mitigate the anticompetitive effects: (1) provisions to prohibit the inappropriate sharing of proprietary information, (2) provisions similar to FERC Order No. 497 to prohibit discrimination in the supply of gas, and (3) additional antidiscrimination measures that ensure transparency of transactions involving sales and purchase of gas transportation services (to prevent hidden discounts to an affiliate) and separation of SDG&E's purchases of gas transportation services from Pacific's services for retail gas sales.(25)

Access Issues, Anticompetitive Agreements and Exclusionary Behavior

As I have already noted, another major focus of antitrust interest will concern the terms of access to transmission grids. I expect our interest will be two pronged: a continued advocacy interest in issues of transmission pricing and access policies,(26) and an enforcement interest with respect to anticompetitive agreements and exclusionary behavior. With respect to our advocacy interest, there is continuing debate concerning the appropriate structure for access mechanisms. As I noted earlier, FERC did not adopt the operational unbundling approach recommended by the FTC's Bureau of Economics, but we expect that operational unbundling will continue to be considered. One approach that appears to have substantial support is the use of an independent system operator or ISO. There are numerous issues that need to be addressed, including the necessary size of the ISO to avoid concerns regarding dominance in generation, how to achieve independence of the ISO from the owners of the transmission lines and generation facilities, and how to prevent transmission owners from impeding access by understating transmission capacity or availability or by vetoing expansions of the grid, or by discriminating against competitors seeking access to the grid.

From an antitrust enforcement perspective, the formation and operation of an interconnected transmission grid with multiple owners can be viewed as a pooling arrangement or joint venture. While the joint venture itself may be efficiency-enhancing, competitive concerns would arise if the operation of the transmission grid is not effectively separated from the joint venturers' power generating operations. In that event, their joint control over the transmission grid could be used to disadvantage rival generators and could present serious concerns under the antitrust laws.

That is an example of a more general concern regarding exclusionary conduct with respect to access to transmission facilities. Although FERC Order No. 888 mandates open access, there remains a concern that incentives and opportunities for discrimination may still be present, through either unilateral or collective action, and rival power generators could be disadvantaged.(27) These problems could be addressed through antitrust enforcement action (unless the operation of a particular transmission grid is protected from antitrust review by the state action doctrine), or a regulatory solution could be sought. FERC in fact recognized that competitive concerns could still arise and that the issue could be revisited.(28) In either event, it will be an issue that we will be following with a great deal of interest.(29)

Conclusion

In summary, these are exciting times for the electric power industry. There are some difficult challenges ahead, and complex issues that will continue to be debated. We look forward to working with everyone involved in the process to make sure that deregulation results in the best possible outcome for competition and consumers.

Endnotes:

1. Otter Tail Power Co. v. United States, 410 U.S. 366 (1973).

2. United States v. Otter Tail Power Co., 331 F. Supp. 54 (D. Minn. 1971).

3. See Comment of the Staff of the Bureau of Economics, Federal Trade Commission, "Promoting Wholesale Competition Through Open Access Non-discriminatory Transmission Services by Public Utilities, Recovery of Stranded Costs by Public Utilities and Transmitting Utilities," Dkt. No. RM96-6-000 (Aug. 7, 1995) ("BE/FERC I"). In the U.K., nuclear plants, with their low marginal costs, are run continuously, and natural gas plants are run only infrequently, as peaking capacity; coal-fired plants tend to be the middle cost units. Id.

4. See Paul L. Joskow, Restructuring, Competition and Regulatory Reform in the U.S. Electricity Sector, 11 J. of Econ. Perspectives, 119, 134 (Summer 1997).

5. Id.

6. See Richard J. Pierce, Jr., Antitrust Policy in the New Electricity Industry" 17 Energy L.J. 29, 42 (1996).

7. 7 See BE/FERC I, supra note 3.

8. 8 See Comment of the Staff of the Bureau of Economics, Federal Trade Commission, "Inquiry Concerning Commission's Merger Policy Under the Federal Power Act," Dkt. Nos. RM95-8-000 and RM94-7-001 (May 7, 1996) ("BE/FERC II").

9. 9 See Comment of the Staff of the Bureau of Economics of the Federal Trade Commission to the South Carolina Legislative Audit Council on The Statutes and Regulations Covering the South Carolina Public Service Commission (Feb. 28, 1994); Letter to The Honorable Kim Malcolm, Administrative Law Judge, Public Utilities Commission of the State of California, from Ronald S. Bond, Acting Director of the Bureau of Economics, Federal Trade Commission, enclosing South Carolina Comment (June 8, 1994).

10. FTC v. Questar Corp., No. 2:95CV 1137S (D.Utah 1995) (transaction abandoned).

11. 11 In the electric power and telephone industries, for instance, regulatory agencies require providers to offer basic, low-cost service that may be subsidized by consumers who purchase additional services.

12. For example, if the transaction promises substantial efficiencies that cannot be obtained through other means, we will try to fashion a remedy that will cure the competitive problem without sacrificing the integrative efficiencies. That happens most often in the case of vertical mergers, those involving firms in a supplier-buyer relationship. In non-merger cases, which we also call "conduct cases," structural relief usually is not an issue because that is not the competitive problem we are trying to address. There, the usual remedy is a cease-and-desist order. But structural relief is a relevant consideration in some joint venture situations, which can present both structural and conduct issues. For example, we have limited the size of certain joint ventures to eliminate market power that resulted in concerns about the competitive behavior of the market. See Home Oxygen & Medical Equip. Co., Dkt. C-3530 (consent order, 1994) (Commissioners Azcuenaga and Starek dissenting); Certain Home Oxygen Pulmonologists, Dkt. C-3531 (consent order, 1994) (Commissioners Azcuenaga and Starek dissenting). We also use a structural threshold in defining safe harbors for joint ventures in the health care area.

13. 13 See BE/FERC I, supra note 3, citing Timothy Brennan, Why Regulated Firms Should Be Kept Out of Unregulated Markets: Understanding the Divestiture in United States v. AT&T, 32 Antitrust Bulletin 741 (1987), and Cross Subsidization and Cost Misallocation by Regulated Monopolists, 2 J. Reg. Econ. 37 (1990).

14. 109 F.T.C. 167 (1986).

15. See BE/FERC I, supra note 3.

16. Id.

17. Pacific Gas and Electric Co., San Diego Gas & Electric Co., and Southern California Edison Co., Dkt. EC96-19-001, et seq. (Oct. 30, 1997) ("Order Conditionally Authorizing Operation of an Independent System Operator and Power Exchange . . . ."). FERC evaluated the proposed ISO under guidelines that had been set forth in Order No. 888 in the context of ISOs for power pools.

18. 16 U.S.C. § 824b.

19. See, e.g., Jonathan B. Baker, From Open Access to Convergence Mergers: An Antitrust Perspective on The Transition to Electricity Competition, before The Competition Symposium (Washington, D.C., Oct. 29, 1997). Jon Baker is Director of the FTC's Bureau of Economics.

20. See, e.g., Mark W. Frankena, Where Are We Now? Electric Power in Transition, ABA Section of Public Utility, Communications and Transportation Law (Aug. 1997).

21. See discussion supra at text accompanying note 10.

22. See, e.g., Baker, supra note 19.

23. San Diego Gas & Electric Co. and Enova Energy, Inc., Dkt. No. EC97-12-000 (June 24, 1997) ("Order Conditionally Approving Disposition of Facilities . . . "). See William L. Massey, Commissioner, FERC, Selling and Buying Power Plant Assets (Washington, D.C., Sept. 22, 1997); see also Frankena, supra note 20.

24. Baker, supra note 19. FERC's analysis of the Enova/Pacific Enterprises merger noted a concern about access to proprietary information regarding competitors, but in the context of a raising rivals' costs theory. The Commission noted that Enova could use such information "to manipulate costs and service to SDG&E's [Enova's subsidiary's] advantage." San Diego Gas & Electric Co. and Enova Energy, Inc., Dkt. No. EC97-12-000, slip op. at 30 (June 24, 1997).

25. San Diego Gas & Electric Co. and Enova Energy, Inc., Dkt. No. EC97-12-000, slip op. at 32-35 (June 24, 1997). FERC considered regulatory evasion to be a "retail issue" that could be addressed by state authorities. Id. at 23. The approach to remedies in this case illustrates the general inclination of regulatory agencies to use conduct remedies rather than structural relief. See discussion supra at text accompanying note 12.

26. See id.

27. This is similar to the concern presented by convergence mergers under the raising rivals' costs theory.

28. FERC Order No. 888 in The Matter of Promoting Wholesale Competition Through Open Access Services by Public Utilities and Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, Dockets RM-95-8-000 and RM-94-7-001 at Section IV.A.2.

29. Similar concerns regarding exclusionary behavior could arise at the local level, in connection with access to distribution facilities by independent marketers.