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MICHIGAN PUBLIC SERVICE COMMISSION
Case No. U-11290
Electric Restructuring
STAFF MARKET POWER DISCUSSION PAPER
Report filed by
The Michigan Public Service Commission Staff
June 5, 1998
With Detroit Edison and Consumers Energy together controlling nearly ninety percent of electricity sales in Michigan, market power is a significant concern as the State moves forward to establish a competitive generation market for electricity. Recognizing that successful restructuring of Michigan's electric industry to establish a robust competitive market may well hinge upon the ability to effectively mitigate market power, the Michigan Public Service Commission, as part of its restructuring framework order (Order No. U-11290 issued June 5, 1997), directed Staff to conduct an investigation of market power issues and prepare a report on the findings. This report is the resultant product of that request. Presented as a discussion paper, the Staff Market Power Report is intended as an initial effort to frame market power issues and identify potential mitigation strategies.
Market power is defined as the ability of a firm, or a group of firms acting in concert, to control product price or entry of competitors into a product market. Market power abuse occurs when this power is exercised to prevent new market entry or eliminate existing competitors, not through the provision of superior products at lower costs, but through manipulation. Thus, while the presence of market power is always a concern, historically, how such power has been achieved and used has been the principal benchmark determining appropriate mitigation action.
Nationally, efforts to restructure the electric industry present a difficult challenge. Since electric utilities have been historically structured as highly capitalized, vertically integrated monopolies, the presence of market power is inherent and represents a significant obstacle to successful establishment of competitive power supply markets. Unless accomplished in a reasoned manner, the market power inherent in this highly regulated monopoly will likely constrain development of a competitive market. Most states with restructuring plans in progress have elected to pursue aggressive, preventive mitigation strategies. Bold preemptory initiatives are certainly understandable given the enormous stakes involved with transformation of this essential industry. Generating revenues of over $200 billion per year, the U.S. electric industry accounts for 2.5 % of the nation's gross domestic product. Waiting for abusive behavior to occur before taking action may be too late. The damage may be irreparable. In fact, a number of states leading the restructuring movement are so concerned about the consequences of failure to mitigate market power that they have resorted to divestiture as a key component of their mitigation strategy. Among the states recommending utility sale of some portion of their generation assets to relieve market power concerns are California, New Hampshire, Massachusetts, New York, Pennsylvania and Maine.
In assessing the degree of concern for market power in Michigan, Staff employed the Hirschman-Herfindahl Index (HHI), a widely recognized tool to measure market concentration. The Federal Energy Regulatory Commission and the Department of Justice both rely on this index for assessing market power concerns. Staff analysis reveals a HHI number of between approximately 2200 and 3300 for the Michigan market, indicating a very high level of market concentration. This is certainly not surprising, given the fact that Consumers Energy and Detroit Edison jointly control nearly 90% of the State's electricity sales. HHI values over 1800 are generally considered to be of serious concern, with values below 1200 cited as sufficiently low enough to not warrant concern. An additional analysis was performed to gauge the sensitivity of transmission expansion as a potential mitigation option. Assuming that current transmission interconnection capacity is doubled and unconstrained, the HHI would be reduced to about 1700. That is still on the high side by most standards, but approaching more acceptable levels. This scenario is particularly insightful, illustrating how aggressive mitigation actions must be if they are to materially affect the highly concentrated electricity market in Michigan.
Factors specifically cited by Staff highlighting market power advantages currently enjoyed by incumbent utility companies are:
Staff concludes that implementation of a proactive strategy to address market power is crucial to the establishment of a vibrant competitive market for the sale of electricity in Michigan. The current Michigan market is so highly concentrated and the advantages of incumbent utility companies are so pervasive that proactive measures are imperative. To commence the mitigation process Staff recommends the following actions be expeditiously considered for adoption:
(1) Establish a clear separation of regulated business operations from generation and other competitive enterprises, and assure Commission access to utility and relevant affiliate books and records.
(2) Conduct an independent, objective study, on an expedited time line, of the current transmission system transfer capabilities, to include assessment of bottlenecks and expansion upgrade opportunities.
(3) Create a large and truly independent ISO with full participation by Michigan utilities.
(4) Require that all direct access contracts be filed with the MPSC and publicly disclosed until such time as a vibrant spot market emerges or is created.
(5) Create the necessary structural and institutional mechanisms, including the required legal authority, where needed, to establish effective regulatory oversight that will be essential to the creation of a properly functioning competitive market for electricity in Michigan.
(6) Establish a "code of conduct" governing the relationship between utility companies and their affiliates.
(7) Require the development of a detailed implementation strategy to significantly increase the availability of competitive supply sources to direct access customers from suppliers other than Detroit Edison and Consumers Energy or their affiliates.
Divestiture of generation, while discussed as an effective and popular option in other states, is not recommended by Staff at this time. As long as Michigan utilities remain vertically integrated, it is critical that functional and behavioral measures to mitigate market power be expeditiously initiated. Moreover, if such means are insufficient to effectively blunt market power and institute a competitive market structure, divestiture must be revisited.
This report was prepared in response to the Michigan Public Service Commission's June 5, 1997 electric restructuring order, Order No. U-11290, directing Staff to investigate market power issues and present a final report by June 5, 1998. The findings and recommendations contained in this document reflect an extensive independent investigation conducted by a Staff research team under the direction of Michel Hiser. Staff team members included: Janet Hanneman, Martin Kushler, Thomas Stanton, and Margaret VanHaften. The results of this study were substantially shaped by review of the literature on market power, examination of developments in other states and the federal government, especially the Federal Energy Regulatory Commission, along with significant public input.
Public input provided throughout the course of the market power study proved highly valuable. The many insightful comments, observations, and suggestions offered were instrumental in underpinning the report's conclusions and helped to shape Staff's recommendations. Formal opportunities to present comments on market power issues germane to the study were provided on two occasions. The first opportunity occurred prior to release of the draft report at a public meeting held in Lansing, Michigan on July 14, 1997. One hundred people representing a large cross section of stakeholder interests attended the meeting, with 10 participants presenting oral comments. Additionally, 15 sets of written comments were submitted, some (4) were presented in addition to oral remarks, others (11) in lieu of oral comments. The second formal opportunity for public comment came after the interim draft report was issued on October 20, 1997. Seventeen sets of comments on the draft report were submitted.
Market power is a complex and controversial subject. Successful restructuring of the electric industry in Michigan may well hinge on the ability to effectively mitigate it. Through this study, Staff has taken a crucial first step in the identification of market power issues which could threaten establishment of a robust competitive market in Michigan and has suggested mitigation options to proactively remedy potentially serious problems. Every effort has been extended to present a careful and balanced report. Any errors, omissions, or other shortcomings are the responsibility of the authors.
TABLE OF CONTENTS
IV. ASSESSING MARKET POWER IN MICHIGAN
V. ANTITRUST LAW AND ENFORCEMENT
VI. REVIEW OF OTHER STATES' ACTIONS REGARDING MARKET POWER
VII. IMPLICATIONS FOR ELECTRICITY INDUSTRY RESTRUCTURING
VIII. CONCLUSION AND RECOMMENDATIONS
IX. RECOMMENDED MARKET POWER MITIGATION ACTIONS
I. INTRODUCTION
A. The Objective: Effective Competition
The prospect of an effective competitive market producing maximum value from capital investment and offering customers a wide variety of choices is certainly enticing. The objective of electric industry restructuring is to achieve a better, more efficient, allocation of resources by increasing the role of market forces where conditions permit, and simultaneously decreasing the role of regulation. Proponents believe that this transformation will result in lower prices and increased efficiency, product improvement, and innovation. Assuming a policy decision to introduce customer choice, the major question to be answered is how best to make that vision a reality: What features need to be present in the marketplace -- both during the transition and after -- in order to assure that competition can take root and thrive?
B. The Importance of Careful Analysis -- Followed by Both Implementation and Appropriate Regulations -- in Pursuing Competition
There is no purely competitive market anywhere, for anything. There are only various mixtures of imperfectly regulated markets and imperfectly competitive markets. Policy makers need to be concerned about finding the best mix of competition and government oversight and intervention to ensure the necessary environment is established that best promotes and nurtures a workably competitive market. If policy development is not comprehensive, restructuring could leave behind the worst of all possible market conditions: unregulated monopolies.
Under most scenarios being actively considered today, the electric industry will be transformed into a hybrid structure, with competition intended to replace regulation in generation, while transmission and distribution remain regulated. Because of the existing market power of incumbent monopoly providers, a competitive market will not naturally appear once regulation is removed. Shepherd predicts that incumbent utilities will continue to dominate their markets for years after the transition to the competitive market because of their inherent and difficult to mitigate advantages.(1) Thus, the competitive framework established during the transition will determine, to a large extent, the potential for development of a workable competitive market. The most desirable condition is almost certainly one of competition in the context of appropriate oversight, where corporate self-interests are kept in check and competition is supported and encouraged by an artfully designed set of regulatory constraints.(2) As Tonn, Hirst, and Bauer point out, "[S]ociety must treat electric-industry restructuring as an empirical problem, with the wisdom to maintain institutions that can make midcourse corrections. "(3) As Kuttner warns, the prominent paradox is that some degree of regulation is required "in order to safeguard competition and allow markets to work more nearly in the textbook fashion." If effective regulation is not present, Kuttner observes, "[f]irms that enjoy market power...retard competition with coercive or anticompetitive mergers, discriminatory or predatory pricing, cross-subsidies, retail-price maintenance, tying or bundling arrangements...and so on." (4)
As the electric generating industry is deregulated, it is anticipated that competitive forces will emerge and regulators will play a smaller direct role in the activities of the generation market. However, the realization of that vision is predicated upon regulators being able to fulfill two important functions. First, it will be essential to proactively establish an industry structure capable of sustaining real market competition. Second, regulators will find it necessary to retain an oversight role to ensure the market is competitive and that dominant players are not able to take advantage of market power to reestablish a monopoly position. Performing these functions will require an understanding of both market economics and the established legal parameters for dealing with potential problems. In addition, familiarity with other states' efforts and experiences in approaching this issue will be helpful. Armed with such understanding, regulators can take a preemptive approach toward mitigating the opportunity for market power abuse while the industry is in transition.
C. Purpose of This Paper
The purpose of this paper is to facilitate discussion of these important issues by providing a conceptual overview of the issue of market power as it relates to the electric industry and to present an initial analysis of the practical implications of market power with regard to electric industry restructuring in Michigan. The paper begins with a definition of market power and a discussion of its impact on the development of a competitive market, followed by a brief history of electric regulation, leading up to the current state of affairs. The potential for market power problems to present obstacles to a properly functioning competitive electric market is discussed in some detail, followed by a rudimentary analysis of the extent of market power in the electric industry in Michigan. The paper then presents sections outlining the extensive federal legislative and regulatory roles in antitrust and related areas and summarizing the positions regarding market power mitigation that have been taken by other states in their restructuring proposals. Next, the paper provides a summary of risks and hazards that open the door for the abuse of market power and issues to be considered as Michigan examines and develops a restructuring plan. That is followed by a discussion of options for mitigating market power. The paper concludes with a brief discussion of the Staff's findings and recommendations for further action.
The issue of market power is complex, and events and circumstances are continually unfolding. As a result, the Staff positions reflected in this paper should be expected to evolve as efforts to examine and respond to the market power issue continues.
II. DEFINING MARKET POWER
A. Basic Definitions
In the most basic characterization, market power is defined as the ability of one or more firms to profitably raise the price of a product by a "small but significant and non-transitory amount without other competitors forcing prices back down." (5) To achieve this end, a firm must be able to control generation levels, prices, distribution systems, and/or other crucial resources, or wield significant political influence or other types of power. Exploitation of market power weakens or eliminates existing competitors and/or inhibits new market entrants. Once competition is weakened or eliminated, the firm gains dominant market power and is able to raise the price and sustain it.
Market power can exist in a variety of forms. In some situations, perhaps the most commonly considered, market power is exercised by a single firm. In others, two or more firms acting simultaneously without any form of agreement, as non-cooperating oligopolies, can exert market power.(6) Finally, there are situations in which two or more firms acting in concert, colluding oligopolies, agree to take actions which exert market power.(7)
According to Frankena, market power can be exercised in either the generation or transmission/distribution components of the provision of electric service. (8) Market power in the generation component of electric service refers to ". . . the ability of a company or companies profitably to bring about an increase in prices above competitive levels in relevant markets for delivered energy, capacity or other generator products by reducing sales of those products from generating sources that they own or control through contracts."(9) Market power in generation can also be exercised in other ways, such as through predatory pricing and cross subsidization, which will be discussed in subsequent sections of this paper.
Market power exercised through the transmission or distribution of delivered energy refers to the ability of a company or companies to ". . . profitably bring about an increase in prices above competitive levels in relevant markets for delivered energy, capacity and other generator products by adversely affecting the availability, reliability or price of transmission service used by competing suppliers to deliver power to relevant customers."(10) Market power can also be exercised in other ways. For example, a company with monopoly power in one product market may be able limit the entry of competitive suppliers into a related market.
As Fox-Penner explains, market power can be viewed using the concepts of "vertical" and "horizontal," both of which are used in describing the general industry structure:
1. Vertical Market Power
The production of electricity, as with any complex manufactured commodity, involves many sequential and related activities (e.g. generation, transmission, and distribution in the electric industry). If a firm controls two or more successive stages of production, as has occurred under traditional electric utility regulation, it is said to be vertically integrated. Frankena points out that:
Thus, left unchecked, a vertically integrated structure presents at least two possible market distortions:
2. Horizontal Market Power
Horizontal market power results from market concentration: a large portion of the competitive resources at any particular level of production is owned or controlled by one or a small number of firms.(13) Such concentration of ownership or control can result in undue price influence as well as the creation or maintenance of entry barriers for new competitors.(14)
For a firm operating in the competitive market, the drive to obtain a concentration of ownership of facilities makes economic sense. As Fox-Penner points out, ". . . legitimate cost savings may be realized by expanding and diversifying one owner's portfolio of generators over many geographic areas and unit types."(15) However, if the firm succeeds in gaining horizontal control of the market, there can be several anticompetitive impacts; for example, the firm may cease to compete aggressively or two or more firms may collude to raise prices.(16) In fact, it has been demonstrated that higher levels of concentration correlate with higher prices in many industries. (17) This concern is relevant for the competitive electric industry. While there is not yet related data available for the competitive electric industry, Biewald, White, and Steinhurst point out that, based on an examination of concentration in power pools, ". . . with ownership of generation facilities as currently structured the potential for abuse of market power is a serious possibility."(18) If a generation company becomes too large and the number of competing firms is reduced, especially within a specific geographic area, the equilibrium between supply and demand can be lost.(19) Additionally, horizontal market power can also occur as a result of mergers and acquisitions of generation facilities.
The geographic variable is key in the discussion of horizontal market power in generation. Transmission access (or the unavailability of transmission access) and associated transaction costs can limit a customer's ability to purchase power from a competing generator. If only a few firms compete for customers in a given geographic market, or if one or two firms have a very large market share within a geographic area, then significant market distortions can result and the ability for firms to successfully collude increases.
As with vertical market power, larger incumbent utilities inherently will possess at least a degree of horizontal market power during the transition to a competitive market; horizontal market power has been a characteristic of the regulated electric industry.
3. Load Pockets
An additional complication which impacts both horizontal and vertical market power is created by the existence of "load pockets," defined as:
Load pockets can offer a generator the opportunity to exploit market power. For example, a firm owning generation facilities both inside and outside a load pocket can operate its facilities to minimize the transmission available into the area, restricting options for customers within the load pocket. Biewald, White, and Steinhurst conclude that this situation creates ". . . opportunities to take advantage of the constraint by charging more for power within the pocket."(21) Frankena raises the same concerns: within a load pocket, if the demand for energy ". . . significantly exceeds the sum of feasible imports into the load pocket plus nondispatchable generation in the load pocket, a hypothetical monopolist of generation in the load pocket would have the ability to profitably increase prices above competitive levels."(22)
4. The Competitive Market
Economic theory abounds with caveats, qualifications, and distinctions necessary for competitive markets to flourish. As explained by classical economic theory, the natural state to which most markets trend is towards monopoly, and (even under the protections provided by modern U.S. antitrust law) there are powerful forces operating towards markets manipulated by oligopolies or cartels.(23) It is only through the application of a variety of social (moral and cultural) and governmental (legislative and regulatory) controls that competition can be sustained in any meaningful way. As Selwyn notes, individual firms in a competitive market " . . .seek to acquire and to exercise market power...[and] [i]ndividual firms will continue to accumulate market power until the costs and risks associated...exceed the potential gains. . .." (24)
According to classical economic theory, a market must be characterized by several vitally important features if it is to be competitive:
In a free and competitive market, prices are thought to be self-regulating. If prices are too high, customers will switch suppliers. If profits are too high, new competitors will enter the market. On the other hand, if one or more firms has too much market power, then abuses can occur.
This paper discusses the features of competitive markets, and how they can be analyzed and understood in relation to the electric utility industry. For now, though, it should suffice to say that today's market for electricity is in transition; it does not fully possess any of the attributes of a competitive market. The potential for both vertical and horizontal market power problems presents challenges to the development of the Michigan -- and perhaps the Midwest regional -- market for electricity.
B. The Importance of Market Power
Market power can be used to prevent new suppliers from entering the market or to eliminate existing competitors, not through the provision of superior products at lower costs, but through manipulation of the market. Some of the means that are employed include: predatory pricing; using cross subsidies from captive customers with relatively inelastic demand for their service to lower prices to those customers with elastic demand; using tying arrangements; engaging in joint ventures that exclude competitors; and -- perhaps most important for the electric utility industry -- controlling access to markets through delivery channels, that is, limiting access between suppliers and customers in the transmission grid. Firms with market power have the ability to extract excess profits from customers.
A complicating factor is that electricity is not just another commodity. Unlike most other products, it is one of life's necessities. For most applications, customers have few, if any, suitable alternatives. Therefore, exerting market power over such an essential service would trap many customers and defeat the objectives of a competitive market.
In order to fully understand the importance of the issue of market power with respect to electricity, it is important to have at least a basic understanding of the history of the electric power industry. Therefore, before proceeding with a more detailed review of the features and factors that define the market for electricity in Michigan today, this paper will provide a brief overview of the history of the electric industry and its regulation.
III. BACKGROUND
A. History of Electric Industry Regulation
The U.S. electric industry has undergone extraordinary expansion since Thomas Edison's Pearl Street Station lit a few neighboring light bulbs in 1882. Today, electricity is arguably one of the most commonly consumed and universally depended upon commodities in the country. In 1995, retail electricity sales reached $207 billion, more than was spent on telecommunications or automobiles.(25) For nearly a century, the sale of electricity has been subject to economic regulation. However, that familiar world is evolving to a new era of competitively traded generation. Some of the problems experienced in the early years of the industry have the potential to emerge again unless adequate attention is focused on avoiding them.
Electric utility regulation in the U.S. has its roots in medieval Europe, when governments "first declared that prices charged for particular 'public' products must be 'just and reasonable'."(26) The basic foundation for government control of business in Anglo-American jurisprudence can be traced back to Lord Hale, of 17th Century England. In his treatise De Portibus Maris, he declared that when private property becomes "affected with a public interest", it "ceases to be juris privati only."(27)
Although the "public interest" aspect of electricity supply is now quite clear, when electric companies began operation in the late 1800s, they were primarily small, individually-owned, unregulated entities selling electric lighting to neighboring homes and businesses.(28) By the turn of the century, there were approximately 3620 small electric companies throughout the country, 2,800 of which were privately owned.(29) Unlike electric utilities today, most of these small companies were not interconnected. (30) Initially, most companies served only cities, often with several companies serving the same areas. Fox-Penner points out that in Chicago, for example, 47 electric companies served the same areas of the city.(31) Eventually, it was learned that the most cost-effective way to supply electricity was by means of a single system. Some cities built their own electric companies while others granted franchise rights to private companies. Thus, electric monopolies were born.
The first decades of the century brought a period of intense, largely unregulated competition among rival firms intent upon supplying electric service. Many small power companies were bought and merged into larger companies; individual ownership was replaced by investor-ownership. An industry that once consisted of many small businesses became consolidated by large holding companies, reducing the number of electricity providers nationwide. These developments proceeded with extraordinary speed. By the late 1920s, the 16 largest electric power holding companies controlled more than 75 percent of all U.S. generation.(32) By 1932, three giant holding companies controlled 49 percent of all investor owned generation in the country. (33)
Regulation at the state level began to take form in the early 1900s, in part in response to the establishment of monopoly franchises. The economic justification for regulation is based on the concept that electric companies are natural monopolies -- an individual electric company providing service to a particular area was the lowest cost way of supplying a single area with service. According to Fox-Penner, "If a market is a natural monopoly, the theory goes, competition to serve the market will lead to excessive instability. . .. In a competitive race for increased market share, rivalry will result in price wars that leave only a single surviving monopoly anyway." (34) Thus, it is more effective to grant exclusive licenses to provide service, require that the service be provided in a nondiscriminatory manner, and prevent the company from earning excessive profits.(35) Rather than fight regulation, some electric company owners, such as Samuel Insull, actually supported this perspective and welcomed the government's protection from what Insull referred to as "debilitating competition."(36) In 1907, the first state regulatory commissions were established in New York and Wisconsin to oversee the development of their electricity businesses. By 1922, most states had established public utility commissions.(37)
As the industry expanded and demand for electric service grew, companies needed capital for new construction. Fox-Penner points out that many power plant owners obtained capital for new construction by leveraging small amounts of capital into larger levels of control; these highly leveraged companies were then purchased by another company, and then another.(38) Thus, tremendous amounts of control were achieved with only minimum amounts of equity. During this time period, competitors built excess capacity and duplicated infrastructure, and then tried to cut prices below costs to put other competitors out of business. Following the pattern that resulted in the eventual breakup of Standard Oil, competitors struggled to gain local monopolies, with the intention that they could then raise rates and earn larger profits. Small customers were seen to be at the mercy of profit-seeking companies.
This concentration of ownership in the electric power industry led to widespread abuses of both customers and investors. By the time of the Great Depression, many of these holding companies were struggling, due in large part to their unstable financial structures.(39) Investigations were initiated by the Securities and Exchange Commission (SEC) and the Federal Trade Commission (FTC). The SEC stated that the holding companies were guilty of ". . . stock watering and capital inflations, manipulation of subsidies, and improper accounting practices."(40) The FTC added to the SEC statement, saying that ". . .[w]ords such as fraud, deceit, misrepresentation, dishonesty, breach of trust and oppression are the only suitable terms to apply."(41)
As a part of the economic reforms pushed by President Franklin Roosevelt in the wake of the economic collapse of the early 1930s, the Public Utility Holding Company Act of 1935 (PUHCA) was passed. Section 1 of PUHCA detailed many of the utility holding company abuses which the legislation was designed to counter, including: extracting from subsidiary utility companies ". . . excessive charges for services, construction work, equipment and materials . . .;" the absence of arm's-length bargaining; controlling subsidiaries ". . . so as to complicate and obstruct state regulation of such companies . . ."; and growing and extending in a way that "bears no relation to economy of management and operation or the integration and coordination of related operating properties." (42)
PUHCA sought to correct the abuses with four strategies:
PUHCA also created a limited category of "exempt" holding companies that were permitted to make investments in nonutility businesses if those investments did not become "detrimental to the public interest, or the interest of investors or consumers." (43)
In 1938, after three years of court challenges, the 'trust busting' by the SEC began in earnest. At that time, 214 holding companies controlled 922 utilities and 1,054 nonutility subsidiaries. By 1955, when the SEC formally ended its campaign, only 25 registered holding companies remained. Over 80 percent of the utilities and subsidiaries that were formerly a part of the massive holding company structures had been divested. In the words of Greenberger, "Today's utility structure can trace its birth primarily to this 17-year diversification festival."(44)
Another important piece of legislation passed during the Roosevelt era was the Federal Power Act (FPA) of 1935. The FPA was enacted primarily to cover the regulatory gap created by the Supreme Court decision in the Attleboro case. (45) In that decision, the court held that Massachusetts could not regulate a wholesale power sale in interstate commerce (electricity bought from Rhode Island by Attleboro) because such regulation put an undue burden on interstate commerce. Recognizing that this decision meant there was no agency with the authority to regulate such transactions, Congress passed the FPA.
The FPA created the Federal Power Commission, the predecessor to the Federal Energy Regulatory Commission (FERC). The FPA focused on price regulation of sales for resale in interstate commerce, including: pricing, terms, and conditions of transmission service rates in interstate commerce; approval over power pooling; and authority to order interconnection. This created the current dual scheme of federal and state regulation of electric utilities.
During that same general time frame, two other significant industry developments were occurring. The first, part of Roosevelt's New Deal effort to expand public electric power and economic development to areas not being reached by the utility holding companies, was the development of major hydroelectric power projects of the federal power administrations. As a base of comparison, in 1921 privately owned utilities were providing 94 percent of total generation, versus only 6 percent by public power. From 1933 to 1941, however, half of all new capacity was provided by federal and other public power installations, resulting in a doubling of public power's share of generation by 1941. (46)
The second major development was the Rural Electrification Act of 1936 which established the Rural Electrification Administration (REA). In the mid-1930s, many homes, farms, and ranches in rural areas were still without lights, indoor bathrooms, refrigerators, or running water because it was too expensive and unprofitable for the investor-owned utilities serving cities to stretch their lines into the countryside. The REA provided assistance and loans to local organizations to provide electricity in rural areas, and by 1941 the proportion of farm homes with electric service tripled. (47)
From the 1940s through the mid-1960s, the electric industry experienced a period of growth, prosperity, and institutional stability. Production cost factors were declining, demand was steadily increasing, and the industry was taking advantage of economies of scale to deliver reliable service at low cost. By most accounts, this was the "golden age" of the electric utility industry.
However, from the mid-1960s through the 1970s, the industry was buffeted by a series of adverse events: First, the Northeast Blackout of 1965 raised concerns about reliability. In the aftermath of the blackout, the electricity industry voluntarily established the North American Electric Reliability Council (NERC). Through its 10 reliability councils, NERC maintains reliable electric service in the three highly synchronized electric transmission grids in North America.(48) Second, the Arab Oil Embargo of 1973-74 resulted in the tripling of fossil fuel prices and unprecedented requests by electric utilities for rate increases.(49) In 1974 alone, U.S. electric utilities filed 212 requests for rate increases totaling $4.5 billion.(50) While only about 50 percent of the amount requested was approved by state commissions, the increases contributed to a reduction in demand growth. Finally, the 1979 accident at the Three Mile Island nuclear power plant led to much higher construction and operating costs, regulatory delays, and greater uncertainty regarding nuclear power. Adding to these complications were the high interest rates and inflation rates in general, causing utility power plant construction costs to soar. Public opposition to nuclear power and increased regulatory scrutiny, which had been building throughout the decade, intensified.
The problem of high prices resulting from these power plants was compounded by excess capacity. As a result of a recession in the early 1980s (driven in large part by oil price increases in 1979) and demand-side efficiency improvements in the late 1980s, customer demand for electricity lagged far behind the projections made in the 1970s. Furthermore, competitors were beginning to intrude into the electric utility dominance of the generation market. This trend toward competition received an initial boost from the Public Utility Regulatory Policies Act of 1978 (PURPA).
Congress passed PURPA in response to the serious energy problems of the 1970s (often referred to as the period of the "energy crisis"). In order to lessen dependence on expensive foreign oil, to avoid repeating the 1977 natural gas shortage, and to control consumer costs, Congress encouraged the development of alternative non-utility generation sources called Qualifying Facilities (QFs) with specific engineering requirements and transmission rights. PURPA required utilities to purchase power from QFs at a price not to exceed the utility's avoided cost and to sell backup power to QFs. States were required to implement PURPA.
In addition to that legislation, other factors were also adding to the pressure for competition. New technologies, such as combined cycle and fluidized bed systems, allowed smaller new plants to be brought on line at costs below those of the large plants of the 1980s and earlier, with shorter construction times, lower capital costs, increased reliability, and relatively smaller environmental impacts. The oil cartel had collapsed by the 1980s resulting in an oversupply of low-priced oil. Plus, in 1978, the federal government passed the National Gas Policy Act, which decontrolled the wellhead production price of natural gas and made further deregulation of natural gas transportation possible. Both of these factors helped to drive down fuel prices. Also, technological advances in transmission brought down the cost of transmitting electric power over greater distances at higher voltages. Because it became economical to transmit electric power farther, it became feasible for utilities with lower cost generation to sell power to previously isolated systems where customers had been captive to higher cost local generation.
The interest in ownership of generation exempt from regulation was strong. For the first time in many decades, non-traditional power producers could build new capacity to supply bulk power markets. This was even true for facilities that did not meet the QF criteria, albeit without all of the contractual benefits PURPA provided QFs. These independent power producers (IPPs) usually did not own any transmission or distribution facilities. While utilities became more reluctant to invest in new generating facilities under cost of service regulation, they also became increasingly interested in participating in this new generation sector. They organized affiliated power producers (APPs) with no assets in utility rate base, built or obtained the rights to generation, and sought to sell this power into their own service territories and the territories of other utilities. In Michigan, non-utility generators represented fully 10% of all electric power generation by the mid-1990s. (51) Consumers Energy Company (Consumers Energy), one of Michigan's two largest electric utilities, became an affiliated partner in many of the state's largest non-utility generation projects -- for example, it owns 45% of the Midland Cogeneration Venture, a 1320 mW QF that supplies approximately 20% of the utility's capacity.
However, these new forms of generators were inhibited from fully entering the generation business, in part (a) because of PUHCA ownership restrictions and PURPA limitations, and (b) because they needed transmission service to compete in electricity markets. With incomplete authority in the FPA and no authority to repeal or amend PUHCA, the FERC encouraged the development of IPPs, APPs, and emerging power marketers by authorizing market-based rates for their power sales on a case-by-case basis and encouraging more widely available transmission access. A generating utility allowed to sell its power at market-based rates could move more quickly to take advantage of market opportunities than those laboring under traditional cost of service tariffs, which had procedural delays to get tariff approvals and changes. Market-based rates helped to develop competitive bulk power markets.
When the FERC approved market-based rates for power, it required that the seller and any of its affiliates lack market power, or mitigate any market power they might have.(52) The major concern of the FERC was whether the seller or its affiliates could limit competition and thereby drive up prices. A key issue studied by the FERC was whether the seller or its affiliates owned or controlled transmission facilities in the relevant service area and therefore, by denying access or imposing discriminatory terms or conditions on transmission service, could foreclose other generators from competing.
As entry into wholesale power generation markets increased, the ability of customers to gain access to the transmission services necessary to reach competing suppliers became increasingly important. In addition, beginning in the late 1980s, public utilities seeking FERC approval of mergers, consolidations, or blanket approval of market-based rates for generation demonstrated mitigation of market power by filing "open access" transmission tariffs of general applicability. The Commission applied its market rate analysis to investor owned utilities (IOUs), as well as IPPs, APPs, and marketers, and allowed IOUs to sell at market-based rates only if they opened their transmission systems to competitors.(53)
In response to the competitive developments and the lack of transmission access, Congress enacted the Energy Policy Act of 1992 (EPAct). A goal of this act was to promote greater competition in bulk power markets by encouraging new generation entrants called exempt wholesale generators (EWGs) and by expanding FERC's authority under sections 211 and 212 of the FPA to approve applications for transmission services. (54)
If the FERC, upon application, determines that an entity is an EWG, that entity is exempt from PUHCA. This allowed IPPs and APPs to develop projects as EWGs, free from the ownership restrictions of PUHCA or the PURPA QF limitations. As amended by EPAct, the changes in sections 211 and 212 give FERC broad authority to order transmitting utilities to provide wholesale transmission on a comparable and non-discriminatory basis.
Since 1992, FERC has issued several major rulemakings addressing open access transmission, stranded costs, transmission pricing, merger guidelines, and information sharing.(55) A public utility owning, controlling, or operating transmission lines is now required to file non-discriminatory open access tariffs that offer others the same transmission service the utility provides itself. The intent of these orders is to bring lower cost power to electric consumers, ensure continued reliability of the electric power industry, and provide open and fair electric transmission services by public utilities.
B. The Current Situation: The Good, The Bad, and the Partially Competitive
As of the late 1990s, most traditional indicators would suggest that the circumstances of electric utilities, both nationally and throughout the Midwest region, are improving considerably. For example: (1) the high cost power plants of the 1980s are gradually becoming depreciated, leading to reduced revenue requirements; (2) demand growth has increased steadily, at 1-3% per year; (3) because of the demand growth and plant retirements, excess capacity has shrunk considerably to the point that many now believe there is a shortage of capacity; and (4) fuel costs are low and relatively steady. These signs would tend to suggest a more stable future and gradually declining rates under the current regulatory paradigm.
These desirable economic developments have been significantly augmented by competitive pressure in the power generation market, enabled by FERC implementation of the EPAct discussed above. However, the pace and magnitude of economic improvement under current regulation have not been sufficient to meet the demands of certain key market participants who are increasingly intent on reducing costs. As a result, the prospect of major industry restructuring and retail competition, where customers can pursue "customer choice" for their power supply, presents the greatest challenge yet for the electric utilities. Lower prices, customized services, technological improvement, and service innovation are among the benefits all customers hope to reap through restructuring.
The primary factors driving the push toward electric industry restructuring include the following:
The combination of the above factors has led to a situation in which certain customers (particularly large commercial and industrial firms) are advocating vigorously for their right to buy cheaper available power rather than being required to buy from their local utility company. Additionally, economic development interests are calling for retail generation competition as a way to provide lower electricity prices. Independent power producers are joining in the movement because they would like to expand their market opportunities through access to retail customers. Finally, policy makers are intrigued by the possibility that competition will produce beneficial cost reductions, product innovation, and diminished need for regulatory bureaucracies.
In the next section, this paper will describe how electric restructuring has been proposed to address current problems in the electric industry, and examine some of the market power obstacles to restructuring that may exist, along with mitigation options to address them.
C. Restructuring: A Proposed Solution
The introduction of competition to the generation component of the electric industry has been proposed as a solution to many of the currently perceived industry problems. It is believed that a properly designed competitive generation framework could result in cost reductions, new service options, and technological innovation, while preserving, where appropriate, desirable features of the current system.
A good example of the intended objectives of restructuring is provided by the National Association of Regulatory Utility Commissioners (NARUC) "Principles to Guide the Restructuring of the Electric Industry."(56) The ten principles NARUC adopted are as follows:
NARUC, in approving these principles, urged ". . . State and Federal regulatory commissioners and legislatures be guided by these principles as they develop and implement new policies to govern the regulation, organization and operation of the electric utility industry.(57)
IV. ASSESSING MARKET POWER IN MICHIGAN
A. Background: Methods & Their Qualifications
Quantifying market power is a difficult task since the determination of a firm's ability to exert market power encompasses many factors; two of the most significant being market concentration and existing transmission constraints. Adding to the complexity of the analysis is the fact that market behaviors are dynamic; market conditions are always changing.(58) It is generally thought that firms in a competitive market will gravitate towards normal (average) profitability (i.e., rates of return on investments), and will demonstrate certain levels and kinds of competitive and innovative behavior. If observations show consequential deviations from those norms, then market power is suspected. It proves very difficult, however, to specify the markets to be analyzed, and then obtain amply detailed and reliable information about the behaviors to be studied.
Traditional measures, and the ones most widely used now, concentrate on the market shares of the companies and how the relevant product and market are defined. (59) Recently, however, econometric models are being used to assess market power in the restructured electricity power industry.(60) Some of these models attempt to analyze behavioral as well as structural factors over sufficient time periods to ascertain whether and to what extent market power exists. These market simulation models can provide insights into:
Extensive modeling can provide more detailed information on market power, but studies need to be carefully performed and analyzed. As Stanford's Energy Modeling Forum points out, "Different estimates of market power could reflect differences in methodologies rather than differences in market structure and behavior."(62)
Therefore, because of these modeling complexities, there currently is a tendency for researchers (especially when the purpose is to obtain information for formal hearings) to rely upon simple indices of market structure as a surrogate for much more complicated measures of actual market behavior. The most widely used quantitative means of analyzing market power involves the use of various indices which measure horizontal market concentration. The best known are the Hirschman-Herfindahl Index (HHI), and the Landes-Posner Index. The HHI for a given market is a single number which represents aggregate market concentration.(63) The Landes-Posner Index provides a somewhat more detailed analysis of market conditions.(64) This indexing system incorporates measures of market share, along with the elasticity of market demand and information about market entry conditions. In addition to the HHI and Landes-Posner Index, some simple ratios based on the market share of the few largest firms are frequently used as screening tools to quickly and simply measure market concentration. For example, if the largest four firms in a market control more than 50 percent, or the largest 8 firms control more than 70 percent, then that fact alone is generally thought to be evidence that substantial market concentration exists. (65)
Though the Landes-Posner Index is a more thorough analysis of factors which indicate when market concentration may be of serious concern, the HHI is used more frequently. In large part, that is because the HHI is relatively simple to calculate, and the underlying data is often readily accessible. The HHI is calculated for a particular market as a whole; not for individual firms operating within a market. This index is regularly used in both U.S. Department of Justice (DoJ) and FERC analysis of mergers.
In spite of the relative ease of creating an HHI for a given industry structure, there are a wide variety of complicating factors that apply to both HHI calculations and analysis. (66) Normative market structure analysis includes at least four major task areas:
Sometimes it is difficult or controversial to decide just what market is being studied (i.e. what product is being sold or where to draw the geographic boundaries for the analysis). (69) Furthermore, in the field of utility regulation, the relevant market may be expanded or constrained by transmission capacity availability. Transmission constraints can limit the number of suppliers that can realistically compete, and markets may vary significantly depending on the load conditions studied.(70) For example, the market for electricity is different at different times of the day, week, and year (i.e., during on-peak, shoulder, and base load or off-peak hours). The same geographic market could reflect low market concentration during off-peak hours, but high concentration during system peaks.
As Chessler explains, geographic markets for any commodity warrant special concern - in both economics and anti-trust law - wherever more than 90 percent of consumption is produced locally and 90 percent of production is consumed locally. (71) Quite logically, the regulated monopoly utility industry reflects just this type of concentration. After all, one of the primary purposes for establishing regulated monopolies in the first place was to concentrate ownership in specific geographic areas, to avoid duplication of facilities. Now, however, the process of bringing competition to the electric power generating business gives rise to a whole new set of concerns regarding geographic market concentration.
Relevant geographic markets for other commodities are often practically determined by shipping costs incurred to deliver products to customers. That same function for electricity is determined by transmission costs. That makes transmission capability a primary concern, among a host of others, in completing market power analyses. For example, it would be helpful to know how large a geographic area around Michigan would need to be included in the definition of the relevant market - and if it is even possible under present ownership of generating facilities -- before the HHI would drop to an acceptable level (see Table 2). Such an analysis could help to determine whether and how much additional transmission interconnect capacity should be available to assure that effective competition could take hold.
Markets are generally categorized in one of six different major types, depending on the degree and kind of competition present.(72) The types range from pure competition at one extreme to pure monopoly at the other. The list includes: pure competition, monopolistic competition, loose oligopoly, tight oligopoly, dominant firm, and pure monopoly. State and federal regulators usually raise concerns about market power somewhere in the middle of this list, that is, somewhere between loose and tight oligopoly. FERC has adopted DoJ guidelines for the review of utility mergers.(73) The guidelines generally establish a correspondence between an HHI which approaches 1800 and a tight oligopoly market structure. The guidelines define a low concern as an HHI total below 1000, medium concern for HHI between 1000 and 1800, and significant concern for HHI above 1800. (74)
Staff cautions readers not to jump to conclusions when reviewing HHI data. Staff recognizes that the HHI measure is nothing more than an expedient and robust means of comparing levels of market concentration at a particular moment in time. It is only a surrogate measure of the potential for a firm to exercise market power. A high HHI score does not, by itself, prove that a market power advantage is actually being abused. At the same time, there is no specific HHI threshold which automatically indicates that a market is acceptably competitive. On the contrary, various observers point to different HHI levels (usually ranging from 2400 down to 1800) that they consider to represent serious market concentration, portending the ability of at least one or more competitors to wield market power. At some point -- usually around an HHI of 1200 -- most analysts would concede that a market may be sufficiently competitive for workable competition to result.
Nevertheless, HHI is widely used as a screening tool to identify potential market power concerns and, as a broad gauge measure, high HHI numbers are cause for concern. From that standpoint, Staff performed several preliminary HHI analyses intended to depict the levels of concentration of Michigan markets for electric generating capacity, both today, and under a couple different scenarios for the near future. One commenter on the draft interim report indicated Staff put too much emphasis on HHI results. As elaborated in detail above, Staff is mindful of the practical limitations of HHI analyses. Staff presents HHI data in this report simply to indicate the general nature of market concentration in Michigan today, and to present an order of magnitude indication of the scope of changes that might be needed in order to reduce market concentration in Michigan to the point were market power concerns would be mitigated.
B. Today's Michigan Market
The Michigan market in 1998 is characterized by significant market concentration, which is clearly suggestive that market power could be a problem if deregulation happened suddenly, without adequate regulatory and competitive safeguards being effectively put into place. The Commission clearly identified this concern in its June 5,1997 restructuring Order in Case No. U-11290 (pp. 43-45), where it reviewed the comments of several interested parties regarding the issue of market power, and directed Staff to complete this study. According to the traditional measures of HHI, the Michigan market is very highly concentrated. A variety of HHI's for Michigan indicate totals well over the threshold of concern, whether measured in terms of capacity, number of customers, or total sales.
Table 1 shows basic HHI data for Michigan electric generating capacity today, generally reflecting current ownership patterns.(75) It incorporates a very optimistic assumption that there is a total of 5000 MW of available transfer capability (ATC) via existing interconnections. (76) Furthermore, it estimates that 20 different firms might vie to sell generation over those transmission interconnections.(77)
Table 2 depicts a hypothetical scenario where ATC is greatly expanded, by doubling interconnection capacity to 10,000 MW. This is just one example of the kinds of changes that might be undertaken in order to reduce the incumbent utilities' market power. As Table 2 shows, this very substantial enlargement of ATC would significantly reduce the HHI score, but still leaves an HHI of 1663, which some observers would still consider a higher than desired market concentration and a harbinger of possible market power problems.
Table 3 shows a scenario for the Michigan market as a whole with zero ATC, which represents conditions sometimes reported for Consumers and Detroit Edison during peak periods of use in the summer months (June through September). This results in an HHI score of 3304.
Table 1: HHI Estimates of Market Concentration
for Michigan Electric Power Capacity (1995, statewide)
Assuming 5,000 MW of Available Transfer Capability (ATC)
| Firm/Ownership | Capacity (approximate MW) | Percent of Market | HHI |
| CECo (w/MCV & contracted NUGs) | 8,150 | 29% | 829 |
| DECo | 10,600 | 37% | 1,403 |
| Other NUGs & IPPs | ~20 firms = 1,350 | 5% | 1 |
| All Others (including muni's, coop's, other utilities) | ~20 firms = 3,200 | 11% | 6 |
| Import Capability | ~20 firms = 5,000 | 18% | 16 |
| Total Market | 28,300 | 100% | 2,255 |
Note: HHI scores depicted on this table for "Other NUGs & IPPs", "All Others", and "Import Capability" assume that 20 different firms comprise each of those market segments. It is likely that fewer than 20 different firms would be competing, meaning higher market concentration and HHI scores. The estimate of 5000 MW of import capability is a best-case rough estimate for base load conditions in Michigan. During peak load periods in recent years, little or no import capability has been available (see Table 3, p. 44). Numbers may not always add to totals, due to rounding.
Table 2: HHI Estimates of Market Concentration
for Michigan Electric Power Capacity (1995, statewide)
Assuming 10,000 MW of Available Transfer Capability (ATC)
| Firm/Ownership | Capacity (approximate MW) | Percent of Market | HHI |
| CECo (w/MCV & contracted NUGs) | 8,150 | 24% | 599 |
| DECo | 10,600 | 32% | 1,013 |
| Other NUGs & IPPs | ~20 firms = 1,350 | 4% | 1 |
| All Others (including muni's, coop's, other utilities) | ~20 firms = 3,200 | 10% | 5 |
| Import Capability | ~20 firms = 10,000 | 30% | 45 |
| Total Market | 33,300 | 100% | 1,663 |
Note: HHI scores depicted on this table for "Other NUGs & IPPs", "All Others", and "Import Capability" assume that 20 different firms comprise each of those market segments. It is likely that fewer than 20 different firms would be competing, meaning higher market concentration and HHI scores. The estimate of 10,000 MW of import capability is a scenario to illustrate the effect of that much additional power being available for competitive supply in Michigan. During peak load periods in recent years, little or no import capability has been available (see Table 3). Numbers may not always add to totals, due to rounding.
Table 3: HHI Estimates of Market Concentration
for Michigan Electric Power Capacity (1995, statewide)
Assuming Zero Available Transfer Capability (ATC)
| Firm/Ownership | Capacity (approximate MW) | Percent of Market | HHI |
| CECo (w/MCV & contracted NUGs) | 8,150 | 35% | 1223 |
| DECo | 10,600 | 45% | 2070 |
| Other NUGs & IPPs | ~20 firms = 1,350 | 6% | 2 |
| All Others (including muni's, coop's, other utilities) | ~20 firms = 3,200 | 14% | 9 |
| Import Capability | 0 | 0% | 0 |
| Total Market | 23,300 | 100% | 3,304 |
Note: HHI scores depicted on this table for "Other NUGs & IPPs", "All Others", and "Import Capability" assume that 20 different firms comprise each of those market segments. It is likely that fewer than 20 different firms would be competing, meaning higher market concentration and HHI scores. Numbers may not always add to totals, due to rounding.
In summary, while high HHI results do not by themselves prove that market power abuses are present or will surface, the magnitude of the scores calculated in this limited HHI analysis conclusively shows that there is a legitimate and serious market power concern in Michigan today, and it is a concern that will likely continue into the future, even as the transition to competition advances. Additional HHI analyses are warranted, to take into consideration the possible effects of enlarging the geographic areas to be studied (e.g. ECAR, other possible regional transmission group areas, etc.).
Regardless of the specific findings of various quantitative analyses of market concentration in Michigan, however, it appears certain that policy actions intended to mitigate market power concerns will be needed in the near future in order to insure the emergence of a truly competitive market. Staff believes that at this juncture in the electric utility industry restructuring process in Michigan, given the magnitude of the stakes involved, policy makers should seriously analyze - and prepare for implementation - an array of progressively more potent, proactive market power mitigation techniques.
This paper now turns its attention to a discussion of the anti-trust laws and federal agency decisions which largely define the parameters within which Michigan must work in shaping its competitive electric market.
V. ANTITRUST LAW AND ENFORCEMENT
Federal antitrust laws were enacted to ensure that markets promote competition and to prohibit monopoly behavior. At various times since enactment of the Sherman Act, antitrust laws have also been used to promote particular social, or populist, objectives, such as limiting business size, protecting small businesses from the actions of large corporations, and expanding entrepreneurial opportunities.(78) In recent years, however, the courts have taken a more narrow approach in interpreting the statutes and the "populist" objectives have largely been left to the market.(79) Under current standards, "...a practice is anticompetitive only if it harms the competitive process."(80)
Historically, antitrust cases have focused more on which business activities are permissible than on measuring and restricting market power.(81) With some exceptions, discussed later, antitrust laws have played only a minor role in the electric industry. There is a general agreement, however, that as the generation industry is deregulated for both retail and wholesale customers, there will be greater scrutiny of electric industry activities and market power analysis under antitrust laws.(82) Furthermore, it is believed that there will be a greater focus on the extent of state oversight over regulated business activities.(83) State public utility commissions and legislators have been encouraged to consider antitrust/market power issues as they restructure the electric industry and set standards for industry behavior.(84)
It is accepted that there are circumstances when a business functions more efficiently as a monopoly, generally when the economies of scale are such that duplication of services is not in the public interest. In those instances, regulation has replaced antitrust law as the primary tool in ensuring that the business does not take advantage of its monopoly power. While it is not common for the antitrust statutes to be applied to regulated entities, the fact that these entities are regulated does not alone grant them an exemption from the standards set forth in antitrust law.
There have been occasions when the courts have heard antitrust complaints against a regulated industry and found violations. Perhaps the most notable in the electric industry was Otter Tail Power Company v US.(85) In its decision, the U.S. Supreme Court affirmed a lower court's finding that Otter Tail violated Section 2 of the Sherman Act by refusing to wheel power to towns whose franchises had expired and who chose to purchase power from other sources. Generally, however, a regulated industry has protection or defenses which provide immunity from such claims. The most common are the Filed Rate Doctrine and the State Action Doctrine.
The Filed Rate Doctrine, first referred to in Keough v Chicago and Northwest Railroad, provides a regulated business with protection from claims of unfair pricing if the rate has been approved by, and is on file with, the jurisdictional administrative agency.(86) Any claims that the rate is unreasonable must be filed with the agency following the appropriate procedures. As electric generation markets become competitive and are deregulated at both the wholesale and retail levels, the regulatory protections provided by the Filed Rate Doctrine will be eliminated.
The State Action Doctrine provides immunity to a regulated business for actions which might be considered anticompetitive, but have been appropriately approved and overseen by a state commission. First articulated by the U.S. Supreme Court in Parker v Brown in 1943, the State Action Doctrine acknowledges state sovereignty: that certain anticompetitive activities may forward particular state objectives and therefore should be immune to claims of antitrust at the Federal level.(87) While public utilities are not exempt from antitrust laws, many of their actions can have immunity based on application of the State Action Doctrine.(88) In California Retail Liquor Dealers Association v Midcal, the Supreme Court held that an action was not subject to the Sherman Act if it was (1) "clearly articulated and affirmatively expressed as state policy" and (2) "actively supervised by the State itself."(89) To meet the first prong of the test, the policy must be expressed by the legislature, not inferred. However, the statute does not need to "explicitly permit the displacement of competition;" it is enough "if the suppression of competition is the foreseeable result" of an action authorized by the state.(90) The Court has also determined that the oversight cannot be cursory; but the state must "exercise ultimate control over the challenged anticompetitive conduct."(91) In its decision, the Court stated:
The active supervision prong of the Midcal test requires that state officials have and exercise power to review particular anticompetitive acts of private parties and disapprove those that fail to accord with state policy. Absent such a program of supervision, there is no realistic assurance that a private party's anticompetitive conduct promotes state policy, rather than merely the party's individual interests.(92)
One of the first indications of the DoJ's approach to electric industry deregulation was its suit against Rochester Gas and Electric (RG&E), filed in June, 1997.(93) The DoJ accused the utility of violating antitrust regulations by hampering competition. In its filing, the DoJ claimed that RG&E offered the University of Rochester "sweetheart" rates and grants if the university would agree not to build its own 23 MW cogeneration facility, and thus not compete with RG&E. RG&E defended itself, claiming in part that the transaction was protected by the State Action Doctrine: that a New York law allows utilities to offer customers with access to alternative supplies of electricity reduced rates to keep them on the system. The court determined the utility did not have protection under the State Action Doctrine if it were determined that the University's generation facility would be a potential competitor of RG&E.(94)/(95) RG&E settled the case, dropping the language that would have prohibited the university from competing in the retail market, agreeing not to enter into other such agreements with potential competitors, and initiating and maintaining an antitrust compliance program.(96) Shortly after the settlement was reached, the University initiated plans to build the generation facility.(97) In discussing the case, a DoJ attorney said:
People in the utility business should recognize that now that competition is being allowed in some forms in their markets, they have to be aware that the assumption that they have state action immunity for all transactions is not a good one.(98)
As the industry is restructured and generation is deregulated, it is anticipated that the State Action Doctrine will become less applicable to the electricity generation sector of the industry. Actions involving transmission and distribution within state jurisdiction, which for the foreseeable future will continue to be regulated, should still be immune from antitrust claims as long as the state legislature and commission meet the Midcal standards.(99) One problem facing state legislatures and commissions will be the need to insure that the two-prong test is met for those regulated actions that should remain immune from antitrust claims. A second concern will be how commissions can balance the regulated and non-regulated portions of the business so that the state action immunity applies where appropriate and market forces are brought to bear on the competitive portions of the industry. These tasks will be especially challenging during the "phase-in" period of retail access.
A. Federal Antitrust Statutes
Federal antitrust laws focus on preventing anticompetitive behaviors from one business acting alone and two or more businesses acting in concert, and insuring that mergers and acquisitions do not create market power abuses. The most relevant sections of the Federal antitrust statutes are Sections 1 and 2 of the Sherman Act and Sections 2, 3, 7, and 8 of the Clayton Act.(100) Additionally, the Federal Trade Commission (FTC) Act and the FPA provide additional guidance on competitive issues. These Federal acts are expected to be an important consideration in the state restructuring process since many of the actions which might result in abuse of market power occur in interstate commerce, and thus fall under Federal jurisdiction. Thus, as components of the industry are deregulated and lose immunities provided by the Filed Rate and State Action Doctrines, more activities of the electric industry will be subject to the scrutiny of Federal statutes.
Contracts, combinations, and conspiracies in restraint of trade are prohibited by Section 1 of the Sherman Act, as well as portions of the Clayton Act.(101) Because a literal interpretation would label most competitive business transactions a violation of Section 1, the Courts have determined that the restraint must be "unreasonable."(102) While a Section 1 violation requires the actions of two businesses, the Courts have determined that the collaborations are not prohibited if occurring between two subsidiaries of the same parent company.(103) Prohibited agreements need not be in writing; with sufficient evidence, implied joint actions can be determined to be a violation.(104)
Actions which generally might be found in violation of Section 1 include horizontal price fixing arrangements between competitors, including price floors, price ceilings, and agreements on price formulas; resale price maintenance agreements between producers and distributors; tying arrangements; group boycotts; refusals to deal; some types of joint ventures; vertical restraints; and territorial allocations or market division agreements.(105),(106) Exceptions have been made by the courts when the agreement facilitates the activity of the market. This is considered a "reasonable" restraint.(107)
Competition will invite opportunities for collusion by members of joint ventures attempting to keep other competitors from participating equally in the market. In the restructured electric utility industry, unless the pools and transmission groups are structured to offer fair access to all, have fair pricing structures, and mitigate market power to the greatest extent possible, it is believed that Section 1 claims will increase. While the FERC has jurisdiction over approving the operation of the power pools and transmission groups, this approval does not carry with it immunity to claims of antitrust violations. Immunity is granted only when Federal legislation requires entities to carry out a particular action that might result in attainment of market power.
Monopolization and attempts to monopolize are generally prohibited by Section 2 of the Sherman Act.(108) The Courts have determined that monopolization involves two actions; (1) possession of monopoly power in a relevant market, and (2) the commission of one or more prohibited actions intended to strengthen, protect, or maintain a monopoly position or to expand the monopoly power into another market.(109) While the action of monopolizing is a violation of Section 2, the courts have recognized that monopolies can occur through legal product growth and development with no intent of monopolizing. Therefore, monopolies -- in and of themselves -- are not violations of Section 2. This may be a key factor in the application of antitrust laws to the transition occurring in the electricity industry. Prohibited monopolization behaviors include predatory pricing or price squeezes, boycotts or refusals to deal with a competitor, and tying arrangements.(110) While the Otter Tail decision in 1973 was followed by new claims of Section 2 violations for refusal to wheel electricity, it is anticipated that wholesale open access will reduce those claims.(111) However, there may be greater scrutiny of transmission related actions and transactions occurring as the result of joint ventures.
Section 7 of the Clayton Act deals with monopoly and oligopoly behaviors by preventing or conditioning mergers and acquisitions that would result in a concentration of market power.(112) This act covers both horizontal and vertical mergers as well as joint ventures. The Hart-Scott-Rodino Antitrust Improvement Act of 1976 requires pre-merger notification to the DoJ.(113) Thus, violations are rare because problems can be worked out before the merger occurs. Generally, when a merger involves regulated businesses, enforcement agencies are able to negotiate changes or condition approval so as to resolve market power concerns. The DoJ and the FTC developed merger guidelines which provide direction to potential merging companies.(114) The FERC recently revised its own merger guidelines to be consistent with those of the DoJ/FTC.(115)
The number of energy company merger applications filed with regulatory agencies has been increasing steadily for the last several years, and most observers of the industry anticipate a continuation of that trend. The DoJ has proposed a moratorium on major utility mergers until the market power impacts of industry deregulation are better understood. The FERC has not yet acted on the proposal.(39) While it is difficult to project into the future, when the flurry of mergers subsides and the "steady state" is reached, estimates suggest that there will be only twelve to forty giant electricity and gas providers in the country.(117) Unless transmission systems are significantly expanded to allow for long distance transmission, competition may be limited.
Section 2 of the Clayton Act, the Robinson-Patman Act, prohibits price and promotional service discrimination.(118) To make a claim under this section, the complainant must demonstrate that "(1) a commodity of (2) like grade and quality was (3) sold to two different buyers (4) in interstate commerce (5) at different prices (6) where the effect may be substantially to lessen competition."(119) A major question regarding the possible application of this act is the definition of "commodity." Natural gas is considered a commodity, telephone service is not.(120) It is as yet unclear how electricity will be defined in this context. In this application, the commodity must be sold in interstate commerce, not just affect interstate commerce.
Section 5 of the FTC Act deals with false, deceptive, and unfair marketing practices.(121) Generally, practices that violate the Sherman or Clayton Acts violate this act. Section 5 is enforced by the FTC, which also promulgates rules and guidelines.(122)
The role of the FTC is discussed later in this section.
Strictly speaking, the FPA is not an antitrust statute; it nevertheless must be considered when discussing antitrust in the electricity industry.(123) The FPA grants the FERC the responsibility to consider the "public interest." In doing so, the Supreme Court has determined, this power ". . . carries with it the responsibility to consider, in appropriate circumstances, the anticompetitive effects of regulated aspects of interstate utility operations."(124) The Court continues, "Consideration of antitrust and anticompetitive issues by the Commission, moreover, serves the important function of establishing a first line of defense against those competitive practices that might later be the subject of antitrust proceedings." The role of the FERC will be discussed later in this section.
Claims under Federal antitrust laws can be pursued by the Antitrust Division of the DoJ; the FTC; State Attorneys General suing on behalf of the citizens of the state; or a private party claiming injury from the alleged violation, including affected customers and potential or actual competitors who have been injured by the action.(125)/(126) Antitrust cases not settled generally are heard in Federal Court, although those involving purely intrastate issues can be heard in state courts. Damages awarded in a suit brought by a private person are three times the amount of the claimed injury.
There is an ongoing debate as to whether existing Federal antitrust laws are sufficient to deal with anticompetitive issues as the electric generation industry is deregulated. The FTC's Baer, on one hand, argues that the current laws were crafted to be "industry-neutral;" that the same laws should apply across all industries. Such action would make it:
easier to stay focused on the basic economic principles and values that underlie antitrust laws and their application and it avoids a crazy quilt of laws that would be difficult to administer and even more difficult to rationalize.(127)
On the other hand, the DoJ has recommended that Congress consider augmenting existing antitrust laws to provide sufficient authority to regulators to remedy market power problems. As Melamed testified, under current law:
the exercise of market power can be addressed only if an entity is attempting to monopolize or if two or more entities are acting in concert in restraint of trade or are proposing to merge.(128)
Since electric utilities traditionally have functioned as monopolies, and thus would not be "attempting to monopolize," they may be able to abuse market power in such a way as to fall through the cracks of the existing law.
B. State Antitrust Statutes
While most antitrust claims are heard in Federal courts, there are some rare occasions when the questioned arrangement is purely intrastate in nature. Michigan's antitrust legislation, the "Michigan Antitrust Reform Act" is based on the Uniform State Antitrust Act (USAA) developed by the National Conference of Commissioners on Uniform State Laws.(129) This statute mirrors Federal law, however it provides less detail. Most states have similar antitrust statutes, based on the USAA, for continuity and consistency.
C. Antitrust Enforcement
1. The Department of Justice
The Antitrust Division of the DoJ, with the FTC, plays a central role in antitrust enforcement and merger review at the Federal level. The DoJ has indicated, both formally and informally, its interest in market power issues resulting from restructuring the electric industry. In its formal comments in response to the FERC's "MegaNOPR," the Antitrust Division focused on four major points:
While electric utility mergers are reviewed primarily by the FERC and affected state commissions, DoJ and FTC also investigate proposed mergers.(135),(136) As previously discussed, under the Hart-Scott-Rodino Act, parties to mergers and acquisitions exceeding a certain size must provide specific information to the DoJ and FTC prior to completion of the transaction. This advance information, along with an opportunity to obtain follow-up information, allows the DoJ and the FTC an opportunity to negotiate changes in the merger agreement without the necessity of a formal challenge. If necessary, the DoJ can seek a preliminary or permanent injunction in Federal court to stop the merger. In recent years, the DoJ has taken a less active role in the review of electric utility mergers, serving as an "Interested Party" in FERC's merger process rather than conducting a separate proceeding.
During the past two years, DoJ has also begun investigations into potential anticompetitive behavior among public utilities by issuing a number of Civil Investigation Demands (CIDs), which are similar to subpoenas. For example, CIDs have been issued to several Texas utilities as part of an investigation into the possible use of transmission tying arrangements in violation of the Sherman Act.(137) While DoJ has indicated the CIDs are, in part, a means to keep track of changes in the industry, some may result in formal action.
Staff of the DoJ has stated that the Department will be watching the transitions occurring in the electric industry for possible antitrust violations. As Assistant Attorney General Melamed testified:
As we move to a competitive generation market, antitrust enforcement will play an even larger role. . . If history is any guide, we could see a wave of electric utility mergers and acquisitions, and we would also anticipate increased temptation -- at a minimum -- on the part of utilities to resort to anticompetitive schemes to ease the competitive pressures of the new market-based environment. It is critically important to have an active and sound antitrust enforcement policy to help ensure a successful transition to competition. The Antitrust Division intends to remain vigilant and active.(138)
While the DoJ's focus in the past has been on vertical relationships, it is anticipated that open access tariffs and the resulting changes in the customer-seller relationship will reduce market power concerns in that arena.(139) Focus will likely shift to horizontal relationships among companies. Cited as potential problem areas are:
DoJ has indicated its willingness to work with states in investigating and litigating, if necessary, charges of antitrust violations. As has been discussed, the investigative process is time-consuming and complex, and generally beyond the scope of duties of many state commissions or state attorneys general. The extensive experience of DoJ staff could be a valuable asset to state commissions attempting to open a competitive electric industry. Since most antitrust investigations are initiated by a business complaint, it is likely that the first test for antitrust law in a deregulated electric industry will be a complaint from an utility, non-utility generator, or marketer. For now, DoJ appears to be taking a "wait and see" approach.(140)
2. The Federal Trade Commission
The FTC is a law enforcement agency with jurisdiction over the FTC Act, including consumer protection provisions, and sharing with the DoJ enforcement of Section 7 of the Clayton Act to prohibit mergers and acquisitions that would lessen competition or create a monopoly. As the only Federal agency with general jurisdiction over consumer protection issues, the FTC views electric industry restructuring from a unique position. The FTC, in conjunction with the Department of Energy, is exploring customer information issues to determine how customers can best receive information on energy sources.
3. The Federal Energy Regulatory Commission
The FERC is not an antitrust enforcement agency, however the issue of market power weaves its way through FERC's jurisdiction and is an obstacle to FERC's objective of a competitive wholesale generation market. As the electric generation industry moves through the transition from a regulated industry to one operating in the competitive market, there are three primary issues before the FERC that deal with market power. 1)The FERC has determined that the public interest is best met with a robust, competitive wholesale generation market. 2)To achieve this end, the FERC has taken action to open access to the transmission lines, enabling competing generators to access non-discriminatory transmission service equally when delivering power to wholesale customers. 3)Additionally, the FERC is employing its revised merger policy in reviewing the numerous merger applications filed in the last few years.
For the past several years, the FERC has focused attention on moving to a competitively-priced bulk power market, and away from traditional cost-based ratemaking for generation in which monopoly power has been curbed by regulatory oversight. One major obstacle to reaching the FERC's objective of a competitive bulk power market is the exclusive ownership of the transmission lines by the public utilities, giving transmission owners the ability to limit or deny use of the lines to competitors.(141)
Opening transmission services through use of non-discriminatory open access tariffs is a key to unlocking the competitive generation market. But, an open access tariff alone will not eliminate abuse of market power. The EPAct enabled the FERC to directly order wholesale wheeling.(142) Prior to the EPAct, the FERC was limited in its ability to open access to transmission services and thus create a fully competitive bulk power market. To accomplish this end indirectly, the FERC conditioned approval of other applications on a utility's agreement to mitigate market power by filing open access tariffs.(143) The FERC used this indirect method of opening access in a variety of merger and market-based rate orders when the applications suggested the existence of market power.(144)
After enactment of the EPAct, the FERC moved more aggressively, issuing Notices of Proposed Rulemaking (NOPR) for both stranded cost recovery and open access tariffs, which resulted in final rules in Order 888 and, on rehearing, Order 888-A.(145) These orders provided details on how open access tariffs for transmission owning public utilities would be structured and how any resulting wholesale stranded costs would be recovered. In these orders, the FERC acknowledged that open access tariffs alone would not necessarily mitigate potential market power abuses. Among other points, the FERC determined:
The FERC is also in the process of approving transmission and power sales agreements for utilities in the process of restructuring. Most notable were the applications for approval of the Power Exchange (PX) and ISO filed by Pacific Gas and Electric, San Diego Gas and Electric, and Southern California Edison (called the California companies), the first such plans to be reviewed by the FERC.(152) In reviewing the applications for power pools, ISOs, and similar entities, the FERC has indicated that it will consider the issue of market power. In its review of the California companies' restructuring proposals, the FERC found problems with the companies' market power studies, determining that the companies underestimated the market power they would retain in the competitive market.(153) The FERC Order stated:
Based on our examination . . .we find that these studies contain some assumptions that appear to be incorrect based on our understanding of actual operations, and analytic techniques that define inappropriately large geographic markets with very low concentrations.(154)
The FERC identified aspects of the market power analysis that indicated market power might be greater than the utilities reported, including:
The FERC concluded that the companies might have a greater level of market power than the studies indicate. However, rather than order the companies to revise the market power study, the FERC determined it would be more beneficial to focus on mitigation of market power.
Under Section 203 of the FPA, no public utility can sell, lease, or dispose of facilities directly or indirectly without FERC approval.(155) If the FERC finds that the proposed merger will be "consistent with the public interest" the merger will be approved.(156) The standard for review by the FERC, therefore, is the public interest; antitrust issues are included only in determining public interest. Conceivably, the FERC could approve a merger with antitrust problems if the merger, overall, is in the public interest. The FERC can approve, deny, or condition the approval as necessary. As the industry moves from regulation to competition, it will be important for merger decisions to be made as quickly as possible, with applicants having a clear understanding of the standards the FERC will use in reviewing the application.
On December 18, 1996, the FERC issued a revised merger policy statement which, it believes, reflects and responds to the changes occurring in the electric industry.(157) The FERC's stated purpose in revising the policy, which mirrors the DoJ/FTC's "Horizontal Merger Guidelines," is to "ensure that mergers are consistent with the public interest, and to provide greater certainty and expedition in its analysis of merger applications."(158)
Prior to revising the policy, the FERC had considered six standards in reviewing a merger application:
The revised merger policy retains only three standards:
In determining the effect of the proposed merger on competition, the FERC will employ the DoJ/FTC Guidelines as an analytical framework. Included in the analysis will be a determination of whether new market entry will be likely, whether there will be market concentration, and whether the merger will result in adverse competitive effects. Applicants will need to provide information on the relevant products, geographic markets for customers and sellers, and market concentration using the HHI.
In reviewing the effects on rates, the FERC will require applicants to propose measures that will provide rate protection for customers. These measures could include "hold harmless" provisions, rate freezes, or "open seasons" for existing wholesale customers. The FERC will encourage applicants to build consensus with other parties prior to filing the application.
The FERC's policy adopts steps to protect regulatory authority. Regarding the possible shifting of forums to the SEC, resulting from the formation of registered holding companies, the FERC will require applicants to either abide by its policies regarding affiliate transactions or the proposed merger will be set for hearing.(161)In assessing the proposed merger's effect on state regulation, the FERC will rely on each affected state commission's authority to approve, deny, or condition the merger as appropriate to protect the state's interests. If, however, the state lacks the authority to do so, it can notify the FERC and the merger can be set for hearing at the FERC to determine whether the merger will negatively impact the state. To date, there have been no such requests.
One of the first indications of how the FERC intends to apply the new guidelines was seen in its approval of the Baltimore Gas and Electric/Potomac Electric Power Company merger to form Constellation Energy.(162) In approving the merger, the FERC rejected concerns raised by its staff that the merger would result in market power at wholesale. The FERC did however, agree with staff that the merger could result in abuse of market power if retail competition were to be introduced in the applicants' service territories. The case record indicated that Constellation Energy would "control 100 percent of the market for firm energy and between 80 and 88 percent of the market for non-firm energy" if retail competition were introduced.(163) According to the merger policy, however, the FERC has said it would not become involved in retail issues unless the affected state(s) does not have authority and requests FERC intervention in retail issues. In this case, both the Maryland and District of Columbia public utility commissions said they were capable of addressing retail market power issues, and the FERC has deferred the retail market power issue to them.
State commissions and the FERC are feeling their way through their new relationship evolving from the transition to competition. How they will work together to address market power concerns is unclear. The jurisdictional line between the FERC and state commissions is not always clear, and there are situations in which the FERC and states disagree on jurisdiction. As the electric industry is restructured, especially during the transition, there are likely to be many instances of federal/state jurisdictional tension. The FERC has offered assistance to state commissions lacking the authority to address specific concerns. For example, the FERC claims both it and states have jurisdiction over legal authority to address recovery of stranded costs resulting from retail wheeling.(164) The FERC has said that, if a state commission does not have authority to address stranded costs resulting from retail wheeling, the FERC will address it.(165) In the same manner, as has been discussed, the FERC will investigate the impact of a merger on retail competition only if the affected state lacks authority and requests assistance.(166) Whether or not this nascent cooperative relationship will work to address market power concerns remains to be seen.
VI. REVIEW OF OTHER STATES' ACTIONS REGARDING MARKET POWER
In completing this review, Staff obtained written materials from states which have either passed legislation or issued regulatory commission orders calling for electric industry restructuring. The following material summarizes the manner in which each of those states addressed the issue of market power.
A. California
The state of California has certainly been a pioneer, perhaps the most identifiable leader, in the expanding nationwide examination of electric industry restructuring. As such, its experience is worthy of careful consideration. According to the California Public Utilities Commission (CPUC), market power has been an absolutely crucial issue to address in its restructuring efforts. In the "Preferred Policy Decision" announcing its restructuring policy the CPUC stated:
We introduce competition to the California electricity market with the conviction that it will deliver desirable market characteristics that have not been delivered by the regulated market regime of the past. But because competition is the foundation of this restructuring, we must be concerned that market power could undermine this foundation and negate the benefits of competition. This concern has served as a screening device in our review of policy options and the choices reflected in today's decision. This concern also compels us to take additional steps to ensure that market power does not impede development of a competitive electricity market in California....the mere existence of market power can undermine our goals for electric restructuring and should be avoided.(167)
Indeed, it would be difficult to overstate the level of concern by the CPUC regarding this issue. In a news article about California's market power efforts, Commissioner Bilas of the CPUC was quoted as stating:
The effort underscores our recognition that market power mitigation is central to electric restructuring in California. Perhaps it's the single most important issue.(168)
While the landmark restructuring legislation in California leaves most of the details to the CPUC, it does echo the basic concern about market power:
There is a need to ensure that no participant in these new market institutions has the ability to exercise significant market power so that operation of the new market institutions would be distorted."(169)
The legislation also identifies the basic policy and structural mechanisms to be pursued:
In order to achieve meaningful wholesale and retail competition in the electric generation market, it is essential to . . . separate monopoly utility transmission functions from competitive generation functions, through development of independent, third-party control of transmission access and pricing. . . competition will best be introduced by the creation of an Independent System Operator and an independent Power Exchange.(170)
In response to these concerns, the CPUC has taken steps to pursue aggressive market power mitigation strategies. In its "Status Report on Market Power to the California Legislature", the CPUC described the extent of those efforts:
From the very beginning of its electric restructuring initiative, the CPUC has been at the forefront of addressing market power issues. In its December 20, 1995, Preferred Policy Decision, the CPUC made clear that it 'must be particularly concerned about market power because competition is the foundation of electric restructuring.' Thus, the CPUC fashioned both vertical and horizontal market power mitigation strategies, stating that 'restructuring mechanisms and mitigation programs are designed to eliminate or reduce market power to the greatest practicable extent.' These mitigation strategies included the establishment of independent market structures, the Independent System Operator ("ISO") and the Power Exchange ("PX"), providing for a direct access bilateral contract market and ordering the voluntary utility divestiture of at least 50 percent of Pacific Gas & Electric's ("PG&E") and Southern California Edison Company's ("Edison") fossil-fired generation assets.(171)
The CPUC has been aggressive in its pursuit of the "voluntary" utility divestiture of generation. It announced an intended "incentive" to be awarded to PG&E and Edison of a 10 basis point increase in rate of return on equity for each 10% of fossil generation capacity divested.(172) In addition, the CPUC has taken "a vigorous role" before the FERC in its federal electric restructuring dockets to ensure that market power issues are adequately addressed. Both the FERC and the CPUC have concluded that those California utilities do have market power in generation, and that market power must be effectively mitigated before FERC can authorize the start of the proposed power exchange.(173) The aggressive strategy appears to be working thus far, as PG&E filed an application with the CPUC to divest 50 percent of its fossil-fired generation and Edison has filed to divest virtually 100 percent of its California fossil-fired generation.(174) (In November, 1997, Edison selected winning bidders for ten generating plants, comprising over half of the generation owned by Edison. The total price received was $1.1 billion, more than 2.5 times the book value of the plants.(175))
1. Vertical Market Power
With respect to the issue of vertical market power, the CPUC has stated:
Our Preferred Policy Decision emphasized our concern that incumbent utilities might be able to exercise market power in the restructured environment. Market power could undermine competition and negate the benefits to be derived from the new competitive framework. We found that isolating control of transmission in the ISO and establishing an independent dispatch ordering mechanism resulting in operational unbundling are two crucial features for effective mitigation of vertical market power. We continue to believe that vertical market power related to ownership of transmission can be effectively mitigated through the ISO and will carefully scrutinize the Applicants' Phase II ISO filings at the FERC to ensure that the ISO is independent and that vertical market power issues are adequately addressed.(176)
2. Horizontal Market Power
On the issue of horizontal market power the CPUC has said:
As discussed in our Preferred Policy Decision, significant concerns regarding horizontal market power from concentrated ownership of generation units, and the resulting potential for anticompetitive behavior, may require the existing investor-owned utilities to divest themselves of a substantial portion of their generating assets . . . PG&E, Edison, and SDG&E have filed horizontal market power studies at the FERC which assume PG&E's and Edison's voluntary divestiture of 50% of their fossil-fired generation. This Commission is not only an active participant in this FERC proceeding, but is also committed to an ongoing examination of market power issues in its own proceedings. Because we are convinced that effective mitigation measures must be in place no later than January 1, 1998, in order to mitigate the potential exercise of market power, we have requested that the FERC schedule a series of joint technical workshops with this Commission on market power mitigation.(177)
B. Maine
The position of the Maine Public Utilities Commission (MPUC) was spelled out in a report and recommended plan it issued on December 31, 1996.(178) In that recommended plan the MPUC recognized market power as a very significant concern. It developed a two-tiered approach to the issue, specifying remedies to the vertical market power problem in some detail, but proposing to conduct a further study regarding horizontal market power in 1998.
1. Vertical Market Power
In addressing the vertical market power issue, the MPUC included the commonly identified remedies of supporting a "truly independent" ISO and a voluntary "regional power exchange." However, its primary focus was on structural remedies regarding ownership of generation. The MPUC described the issue as follows:
Market power exists when one company can gain an advantage over competitors through its affiliation with the provider of a related service. If a T&D utility is affiliated with a power provider, the T&D utility would have the incentive and the ability to use its monopoly position in the T&D market to favor its affiliate. Favoritism could take the form of 'self-dealing' (i.e., favoring the affiliate when purchasing services), steering customers toward the affiliate, or giving the affiliate preferential access to information or T&D services. . . Common ownership of power production facilities and T&D is an impediment to effective competition.(179)
In response to that concern, the MPUC recommended a two-step process leading to full divestiture. By January 1, 2000, Maine's IOUs would be required to transfer all generation related assets and activities, including all electric sales activities, "to corporations distinct from their transmission and distribution (T&D) businesses."(180) By January 2006, Maine's two largest IOUs (Central Maine Power and Bangor Hydro-Electric) would have to divest their generation assets and related functions. "The remaining T&D utilities would not be affiliated with any company that owns generating facilities or sells power."(181)
The MPUC acknowledged that there were costs and risks to requiring divestiture, but it concluded:
Despite the costs and risks, the benefits of CMP's and BHE's divestiture of their generating assets predominate. Effective competition among generation providers is critical for consumers to benefit from a right to choose suppliers. Effective competition depends, in large part, upon the T&D utility being a neutral link between power providers and customers. Ordering divestiture and prohibiting the T&D utility from selling power into the retail market are necessary to ensure the T&D utility serves as that neutral link.(182)
Two additional aspects of the MPUC Order regarding the divestiture issue are especially worthy of note. The first was the discussion of why structural separation was an inferior remedy when compared to divestiture. The MPUC wrote:
For several reasons, we believe structural separation alone is inadequate. First, structural separation would require continued regulatory oversight, which would depart from the restructuring principle that, where viable markets exist, market mechanisms should be preferred over regulation. Ensuring arms-length transactions in a competitive market would protect customers more effectively than regulating affiliate conduct. Reviewing, in the regulatory process, the details of multiple and complex affiliate transactions would be cumbersome, litigious, and expensive. Ultimately, it would protect consumers less effectively than the direct price discipline of a competitive market. Divestiture would allow competitive forces to replace regulation as the guarantor of arms-length dealing.
Second, affiliated companies' incentives to take advantage of joint ownership of power-producing and T&D facilities are identical to the incentives in a vertically integrated utility. In fact, the incentive for abuse in the affiliate model may be greater than the incentive in the vertically integrated utility model under traditional regulation because there would be no limit on the profit from power sales. At the same time, regulators' ability to detect and remedy such conduct would diminish. Specifically, under a subsidiary structure, there are schemes that favor the unregulated generation company at the expense of the T&D utilities' customers. These include using capital structures to subsidize higher risk, non-regulated enterprises; "creative" accounting for shared costs; preferential access to T&D customer information and records; insufficient reimbursement to the regulated T&D utility for personnel transferred to the unregulated subsidiary; expansion, or refusal to expand, the transmission and distribution systems to the benefit of affiliated generation companies over other competitors; and preferential bundling of ancillary services. Such activities are difficult and expensive to detect and correct through regulation or anti-trust litigation.(183)
The second important element was the MPUC position regarding its authority to order divestiture. One interesting aspect was the following:
Some commenters suggested that mandatory divestiture may violate the takings clause of the United States Constitution. On the contrary, the United States Supreme Court found mandatory divestiture of utility assets under the Public Utility Holding Company Act (PUHCA) ~11(b)(1) does not violate that clause. See North America Company v. SEC, 327 U.S. 686 (1946). State-ordered divestiture raises no constitutional issues different from those addressed by the Court in North America. Moreover, although the takings clause could be implicated if forced divestiture resulted in a substantial reduction in the value of investors' holdings in the utility, the Commission would allow investors the same opportunity as they have now to recoup the value of their holdings through the stranded cost charge and the fair determination of the value of divested assets.(184)
2. Horizontal Market Power
The MPUC explicitly acknowledged the potential horizontal market power problem:
There is a risk that some market participants may control a large enough share of the region's power supply to allow them to exert undue influence over market prices. In that event, the benefits of restructuring would not flow to consumers.(185)
Rather than propose specific further remedies now, however, the Commission stated that it would complete a market power study in December 1998. It indicated that such a schedule would still provide ample time to recommend any necessary remedies before retail competition begins in Maine in 2000. In deferring the issue at this time, however, the MPUC underscored the importance of taking action before the onset of retail competition:
To the extent possible, opportunities for market power should be minimized before retail competition. After-the-fact anti-trust enforcement would be expensive and likely ineffective, because the unlawful exercise of market power is difficult to detect and even more difficult to prove. The Commission recommends that the Legislature direct state agencies, including the Commission, to study [the] regional power market and recommend steps to minimize market power opportunities before the date of retail access.(186)
The Maine legislature adopted the MPUC recommendation to require divestiture and accelerated the timeline for action. The legislation, "An Act to Restructure the State's Electric Industry," specifies that by March 1, 2000, unless extended by the Commission:
. . . each investor-owned electric utility shall divest all generation assets and generation-related business activities other than any:
- Contract with a qualifying facility or with a demand-side management or conservation provider, broker or host;
- Ownership interest in a nuclear power plant;
- Ownership interest in a facility located outside the United States; or
- Ownership interest in a generation asset that the commission determines is necessary for the utility to perform its obligations as a transmission and distribution utility in an efficient manner.
No later than January 1, 1999, each investor-owned electric utility shall submit to the commission a plan to accomplish the divestiture required under this subsection. In an adjudicatory proceeding, the commission shall review the plans for consistency with this chapter. By July 1, 1999, the commission shall issue an order approving the plan or modifying the plan to make it consistent with the requirements of this chapter. . .
. . .the commission . . . may, in an adjudicatory proceeding, require any investor-owned transmission and distribution utility to divest its ownership interests in the Maine Yankee Atomic Power Company after January 1, 2009. . .
The commission by rule shall require each investor-owned electric utility after February 28, 2000 to sell rights to capacity and energy from all generation assets and generation-related business, including purchased power contracts that are not divested pursuant to subsection 1, except those rights to capacity and energy that the commission determines are necessary for the utility to the perform its obligations as a transmission and distribution utility in an efficient manner. . .
Except as otherwise permitted . . . on or after March 1, 2000, an investor-owned transmission and distribution utility may not own, have a financial interest in or otherwise control generation or generation-related.(187)
Under Section 3205, the Commission was directed to adopt rules "implementing the provisions of this section, including . . .rules governing the procedure for divestiture. . .(188)
In a related development, Duff and Phelps Credit Rating Company (DCR) has upgraded its assessment of the debt ratings of Central Maine Power Company, reporting:
The status change reflects DCR's expectations of significantly improved credit protection measures and a lower business risk profile following the divestiture of its hydro, fossil and biomass power plants, if approved by the Maine Public Utilities Commission.(189)
C. Massachusetts
The Massachusetts Department of Public Utilities (MDPU) devoted an entire section of its December 30, 1996 "Electric Industry Restructuring Plan" to the issue of market power. In its discussion of the issue, the MDPU made the interesting observation that the status of utilities as longstanding, well-established entities in the community exacerbates the potential for market power. The MDPU wrote:
The Department is committed to establishing a framework in which the potential for both vertical and horizontal market power abuse will be minimized. Some of the most challenging issues in the restructuring of the Massachusetts electric industry arise from the fact that the new retail services market is not being created de novo, but rather is emerging from a backdrop of several decades of monopoly regulation. Existing and longstanding patterns of commerce create hurdles to competition that must be overcome.(190)
The MDPU added a note signaling the difficulty of the task:
[T]hose electric companies that have enjoyed a monopoly position cannot be expected to forgo willingly the advantages that monopoly status afforded them in the past.(191)
The MDPU then went on to specify a number of remedies it was proposing to deal with the issue of market power.
1. Vertical Market Power
As a first step, the MDPU recommended "a truly independent regional transmission system operator who will have control over the dispatch of generation and over system reliability through operation of the transmission grid."(192) The MDPU acknowledged, however, that it did not have the authority to mandate a regional solution, so the Department pledged to work with the other PUCs in New England to advocate before FERC for an effective ISO.
With respect to corporate structure, the MDPU clearly indicated that its preferred solution was divestiture.(193)
The Department continues to encourage the voluntary divestiture of generation assets by the electric companies to protect against self-dealing and vertical market power abuse, to minimize the future regulatory burden on themselves, and to further the reality, as well as the appearance, of full and fair competition.(194)
However, in the absence of authority to order divestiture, the MDPU concluded that the minimum structural change it would accept was functional separation with clear rules of conduct. It said:
Based on comments received, the Department is firmly persuaded that the functional separation of generation, transmission, and distribution divisions within an integrated company, with clear, enforceable corporate rules of conduct to govern how the divisions interact, is the minimum acceptable approach to corporate structure for the electric companies. Moreover, each electric company that retains generation assets, and plans to sell power in the competitive marketplace, must establish a separate marketing affiliate in order to minimize the potential for the unregulated portion of the business to be subsidized or provided with a competitive advantage by virtue of its connection to a ratepayer-funded entity.(195)
Even with that recommendation, the MDPU acknowledged the potential for abuse:
. . . we remain sensitive to the possibility that regulated electric companies with non-regulated affiliates or divisions may engage in market power abuse, or exact subsidies from ratepayers to fund the activities of a competitive division, by affording their affiliates preferential access to information, tying the purchase of one product or service to the purchase of another, or through other anticompetitive conduct.(196)
And, therefore, in November 1996, the Department issued a revised draft code of conduct detailing various rules designed to avoid market power abuses. The MDPU also stated it was seeking explicit authorization from the legislature to impose monetary penalties on any distribution company that violates the rules of conduct established to govern interactions between regulated and competitive divisions of the parent firm.(197)
2. Horizontal Market Power
The MDPU has adopted the principle that "there must be a sufficient number of buyers and sellers to ensure competitive behavior."(198) Yet it was cautious about its ability to assure such an outcome.
The detection of excessive horizontal market power and remedies for its abuse are elusive, because the market within which such abuse could occur has not yet been completely defined and is not yet in full operation.(199)
On the other hand, the MDPU expressed some optimism that the steps it had already proposed would help provide a competitive market, and pledged to monitor the situation as the market evolved and take further actions if necessary:
In presenting our vision of a restructured industry, we have proposed a number of steps to ensure a robust generation market, such as the creation of an ISO, policies that minimize the ability of electric companies to capitalize unfairly on their incumbent role, and the application to electric companies of rigorous corporate rules of conduct. However, as the electric services market evolves in Massachusetts, we will assess the degree to which competition exists and will take such actions as necessary to ensure that the full benefits of competition are achieved.(200)
Finally, the MDPU also stated that it would be vigilant in reviewing proposed mergers:
In addition, we plan to evaluate carefully any proposed mergers within our jurisdiction in light of the potential for market concentration on a regional basis and potential abuses of horizontal market power.(201)
Subsequent to the MDPU Order, several Massachusetts utilities have announced plans and/or submitted settlement agreements to divest their generation assets, including Boston Edison, Eastern Utilities Associates (EUA), the New England Electric System (NEES), and Unitil/Fitchburg Gas and Electric (FG&E). NEES has actually contracted to sell all of its 18 non-nuclear plants, with a book value of $1.1 billion, to USGen New England for $1.5 billion.(202)
D. Montana
In 1997, Montana passed the "Electric Utility Industry Restructuring and Customer Choice Act".(203) The legislation indicated concern about market power and included several specific provisions regarding the subject. The legislation directed the Commission to
". . .promulgate rules that protect consumers, distribution services providers, and electricity suppliers from anti-competitive and abusive practices."(204)
1. Vertical Market Power
With respect to vertical market power, the legislation specified the following:
To the extent that a public utility is vertically integrated, a public utility shall functionally separate the public utility's electricity supply, retail transmission, and distribution, and regulated and unregulated retail energy services operations in the state of Montana upon application to and approval from the commission. . . The commission may not order a public utility to divest itself of any generation assets or prohibit a public utility from divesting itself voluntarily of any generation assets.(205)
Public utilities shall (a) prevent undue discrimination in favor of their own power supply, other services, divisions, or affiliates, if any; (b) prevent any other forms of self-dealing that could result in noncompetitive electricity prices to customers; and (c) grant customers and their electricity suppliers access to the public utility's retail transmission and distribution system on a nondiscriminatory basis . . .The provisions of this section are satisfies if the public utility adopts and complies with a code of conduct consistent with the federal energy regulatory commission approved code of conduct. . .(206)
2 Horizontal Market Power
The legislation did not go into much detail on the issue of horizontal market power, but did contain these directives:
The commission shall decide if there is workable competition in the electricity supply market by determining whether competition is sufficient to inhibit monopoly pricing or anticompetitive price leadership. In reaching a decision, the commission may not rely solely on market share estimates.(207)
[T]he commission may determine that additional time is necessary for customers . . . however, the implementation of full customer choice may not be delayed beyond July 1, 2004. . . A determination by the commission that additional time is necessary . . .must be based on one or more of the following . . . Montana customers or electricity suppliers would be disadvantaged due to lack of a competitive electricity supply market.(208)
In a related development, the Montana Power Company announced in December, 1997, that it will offer for sale all of its Montana electric generating facilities (13 dams and four coal-fired plants) as well as its leased interest in another coal fired plant and its contracts for power purchased from independent producers.(209)
E. Nevada
Nevada has also passed legislation to allow customers direct access to alternative sellers of electric services.(210) The legislation contains numerous elements indicating concern about market power and directing the Nevada Public Service Commission to take certain actions regarding market power. These include:
The commission shall determine that an electric service is a potentially competitive service. . .[based on specific standards].(211)
The commission shall prohibit a provider of a noncompetitive service from providing a potentially competitive service, except through an affiliate of the provider. . . The commission shall require each provider of a noncompetitive service that is necessary to the provision of a potentially competitive service to make its facilities or services available to all alternative sellers on equal and nondiscriminatory terms and conditions.(212)
The commission shall monitor the markets for electric services . . . to identify and prevent activities that are inconsistent with the goals of . . this act. The commission shall establish standards of conduct related to activities that are inconsistent with the goals of . . . this act and establish penalties for such activities and procedures for imposing the penalties; and establish conditions and limitations on the ownership, operation and control of the assets of a provider of an electric service to prevent activities that are inconsistent with the goals . . .of this act and ensure the development of effective competition for electric services. Such conditions and limitations may include, but are not limited to, limitations on the ownership, operation and control of transmission facilities and any generation necessary to the reliable and economic operation of such transmission facilities. (213)
Upon showing of good cause by a party requesting an investigation or upon motion of the commission, the commission shall conduct an investigation of the operation of the relevant markets for any electric service in this state to determine whether those markets are functioning in a manner consistent with the provisions . . . of this act. The investigation must include, without limitation, the effect on the market of:
(a) Mergers, consolidations, or acquisitions of the assets or the securities of providers of electric services;
(b) The disposition of ownership, operation or control of the assets of providers of electric services;
(c) transmission congestion or constraints; and
(d) Anticompetitive or discriminatory conduct.(214)
The commission may require an alternative seller or an electric distribution utility or a vertically integrated electric utility to provide information directly related to the provision of electric services by the alternative seller, electric distribution utility or vertically integrated electric utility . . . in accordance with the regulations of the commission relating to the discovery of information for a provider of electric service. If evidence is presented to the commission that anticompetitive or discriminatory conduct, including, but not limited to, the unlawful exercise of market power, is denying customers the benefits of effective competition in a market for electric services, the commission shall
(a) Consult with, and transmit such evidence to, the attorney general; and
(b) If appropriate, inform, and transmit such evidence to, the United States Department of Justice and any appropriate federal agency.(215)
Each entity providing a potentially competitive service or a noncompetitive service shall submit to the commission annually . . . information that the commission determines is necessary to . . .[m}onitor the development of competition to provide electric services.(216)
The commission shall provide a quarterly report for the legislature that assesses the developments in the electric industry in the State of Nevada. The reports . . . must include . . . a discussion of . . . [w]hether there is effective competition for each potentially competitive service.(217)
F. New Hampshire
In its "Final Plan" for restructuring, the New Hampshire Public Utilities Commission (NHPUC) defined and described market power as follows:
We define market power to mean the ability of a seller, or group of sellers, to influence price for a significant period of time. Sellers with market power may reduce competition along dimensions other than price, such as product and service quality and technological innovation. Ultimately, the result of a firm's exercise of market power is a transfer of wealth from buyers to sellers or a misallocation of resources. In competitive markets, the number of individuals buying or selling a homogeneous product is so large and each participant's relative share of the market so small, that each buyer and seller believes that variations in the quantity bought or sold will have an imperceptible effect on the market. Consequently, in competitive markets, no participant can exert market power.(218)
For the basic market structure, the NHPUC recommended a "hybrid model", including both bilateral contracts and a power exchange. It argued that neither of those mechanisms alone would be sufficient and that each offered unique benefits. For example:
Sophisticated and large volume consumers may receive the economic gains of lower prices through shrewd negotiations, while smaller volume consumers may benefit by purchasing from a power exchange, thus minimizing the complexity and cost of their market transactions.(219)
In addition:
We believe that the ability to sell power directly to a spot market or pool distinctly benefits small producers who may find tepid demand in a purely bilateral contract market.(220)
The NHPUC also endorsed the importance of an independent ISO, describing its powers as follows:
The ISO should be able to balance load with resources under its control, allocate curtailments related to transmission constraints based on market price, redispatch to relieve transmission constraints, and have under its control sufficient assets to provide backup service if an unscheduled outage occurs.(221)
1. Vertical Market Power
In the original "Preliminary Plan", the NHPUC discussed vertical market power concerns and ". . . expressed skepticism that these concerns could be addressed adequately through standard cost allocation and affiliate transaction rules."(222) After receiving comments from various parties on the Preliminary Plan, the NHPUC's position on vertical market power became even more firm. In the Final Plan, it directed the following:
Despite PSNH's assertions to the contrary, we believe there is an abundance of evidence that vertically integrated utilities possess the ability to discriminate against unaffiliated suppliers. The shared ownership and control of generation, transmission and distribution assets provides both the opportunity and the incentive for management of regulated companies to favor competitive affiliated suppliers. The implementation of affiliate transaction rules insufficiently restricts the incentive to exercise market power. We believe the corporate ties between regulated and competitive functions must be severed in order to eliminate this incentive. In our view, the only way to sever these corporate ties is through divestiture. We define divestiture to mean that an existing utility may no longer provide competitive and non-competitive services. If a jurisdictional utility chooses to be a distribution company, we will require it to submit a plan by December 31, 1997 to divest its generation and aggregation/marketing functions by the end of the two year period following the initiation of competition. We also will require such utilities to sell off any right to obtain power under existing power purchase contracts.(223)
In addition:
We note that divestiture may produce two additional benefits which promote the development of effective competition while advancing the public interest: the recognition of hidden value in generation assets which is unlikely to be reflected through the application of an administrative approach to asset valuation and the elimination of the anti-competitive effects of stranded cost charges.(224)
2. Horizontal Market Power
The NHPUC indicated that it considered horizontal market power to be an important concern, but that it needed to wait for NEPOOL to finish its market power study before addressing that issue.
Since NEPOOL has not yet filed the required market power study, we are unable to comment on this important issue. We intend to review and offer specific comments on the market power implications associated with NEPOOL's restructuring proposal during the FERC proceeding.(225)
Restructuring legislation was also passed in New Hampshire establishing policies to guide the New Hampshire Commission in implementing statewide electric utility restructuring.(226) With respect to market power, the legislation noted that choice for retail customers cannot exist without a range of viable suppliers. The guides that govern market activity should apply to all buyers and sellers in a fair and consistent manner in order to ensure a fully competitive market.(227)
The legislation also specified that generation services should be at least functionally separated from transmission and distribution services. However, distribution companies should not be precluded from owning small scale distributed generation resources to minimize transmission and distribution costs.(228)
One of the state's utilities, Granite State Electric Company, has already signed an agreement with the Governor pledging divestiture of its generating assets if its parent company, NEES, receives divestiture approval in its other state jurisdictions.(229)
G. New York
The New York Public Service Commission (NYPSC) in its Order on Competitive Opportunities for Electric Service, identified three basic options for corporate restructuring.(230) These were: (1) functional separation (separate books and records within the utility); (2) structural separation (separate subsidiaries or a holding company); and (3) divestiture (sale or spin-off of generation assets).
The Commission indicated its strong preference for divestiture, and wrote at length about its virtues:
Critical to a movement toward a restructured industry is the need to avoid undue concentration of market power and particularly the use of monopoly power on the distribution side to unduly restrict choice on the generation side. Divestiture of generation and energy services is a clear way to allay concerns about vertical market power and avoid anti-competitive behavior (such as cross-subsidies among affiliates in both competitive and monopoly environments, and favored treatment of affiliates). Divestiture may create a larger number of competing generating companies and ESCOs, which can result in a dynamic and aggressive market. Also, an advantage of divesting generation is that a clear market value for generating assets is established, allowing a determination of, and hence greater recovery of, strandable costs early in the process.(231)
Ultimately, the NYPSC stopped just short of requiring immediate divestiture, but signaled its intent to pursue that end result.
We strongly encourage divestiture, particularly of generation assets, but do not require it immediately. Incentives for divestiture should be worked out individually for each company in conjunction with its filing.(232)
The Commission's emphasis on divestiture is showing some impact. In December, 1997, Niagara Mohawk Power Company filed its plan with the NYPSC calling for it to auction off its fossil-fueled and hydroelectric generating assets. The utility stated that proceeds from the plant sales would be used to pay down debt.(233)
1. Vertical Market Power
In addition to the strong language on divestiture, the Commission included the commonly called for mechanisms of an independent system operator (ISO) and a power exchange. The Commission clearly stated the importance of a truly independent ISO:
However, the Commission left it to the parties to pursue a proposed resolution to the details of the ISO and the market exchange, which were then to be submitted to the NYPSC and FERC.
The NYPSC also raised one other vertical market power issue, relating to energy services, although it declined at that time to take action on any specific remedies.
Market power concerns similar to those regarding ownership of generation are raised when a utility owns both the transmission and distribution facilities and an energy service company operating in the same service territory. Vertical integration of energy service and transmission and distribution could result in cross-subsidization of energy service company operations and provide company marketers with special access to customer and system information. These opportunities to game the system could dampen the interest of new entrants in the electric retail market. While divestiture of energy service company operations is encouraged, for now we will allow utilities to continue to provide energy services to their customers either directly or through an affiliate.(235)
2. Horizontal Market Power
The NYPSC indicated strongly its intention to protect consumers from horizontal market power.
While competition encourages efficiency and induces suppliers to charge prices approximating marginal costs, suppliers with dominant market power are more likely to earn excessive profits or charge prices that reflect wasteful practices. In order to ensure that electricity customers are not subject to the abuses of dominant market power, we reserve our authority to protect consumers if a supplier obtains dominant market power (Public Service Law Section 66(12).) We will also take a variety of steps, such as the prevention of the formation of dominant market power, to protect the consumers. For example, we will exercise our authority to address stock or asset acquisitions that would lead to dominant market power. (PSL Section 70) We also have authority under various provisions of the Public Service Law including Sections 69 and 108, to regulate mergers.(236)
In addition, one particular area of concern the Commission identified was the problem of "load pockets," i.e., when, due to transmission system limitations, some generation in a particular location must be operated to preserve system reliability.
New York conducted a statewide study in 1996 and found over 30 areas considered to be load pockets. The report concluded, and the Commission concurred, that additional analysis must be done to better understand the problem and to identify the best options to remedy it.(237)
H. Oklahoma
On April 25, 1997, Oklahoma enacted legislation calling for the restructuring of its electric industry. The new law is very brief (ten pages total) and consequently does not go into much detail. The legislation declares a goal of retail competition by July 1, 2002, and directs the Oklahoma Corporation Commission to undertake a study and recommend a restructuring framework by August 31, 2000. "Market Power" was listed among the specific issues to be examined.(238) The only other mention of the market power issue is in the following passage included in the "principles" to be adhered to by the Commission in developing the framework:
Entities which own both transmission and distribution, as well as generation facilities, shall not be allowed to use any monopoly position in these services as a barrier to competition. Generation services may be subject to minimal regulation and shall be functionally separated from transmission and distribution services, which services shall remain regulated.(239)
I. Pennsylvania
The Pennsylvania Public Utilities Commission (PPUC), in its July 1996 "Report and Recommendation to the Governor and General Assembly on Electric Competition", emphasized the need to restructure the framework of the current IOUs, but adopted a strategy of flexibility for individual utility companies:
The change to full-scale retail competition cannot occur absent restructuring the institutional framework of the current investor-owned electric service providers. Therefore, all Pennsylvania electric utilities are expected to submit to the Commission a tentative restructuring plan by April 1997. Since each utility faces different financial conditions, cost structures, generation supply and transmission capabilities, and market pressures, the commission expects that individual utility proposals will meet the needs of all stakeholders while moving marketplace restructuring forward.(240)
The Commission did outline the minimum elements which the utilities were required to address, including corporate structural changes and a schedule for introducing those changes. Considerations were to include:
In its subsequent legislation, the Pennsylvania legislature passed legislation stating:
The commission shall monitor the market for the supply and distribution of electricity to retail customers and take steps as set forth in this section to prevent anticompetitive or discriminatory conduct and the unlawful exercise of market power.(242)
Upon complaint or upon its own motion for good cause shown, the commission shall conduct an investigation of the impact on the proper functioning of a fully competitive retail electricity market, including the effect of mergers, consolidations, acquisitions or dispositions of assets or securities of electricity suppliers, transmission congestion and anticompetitive or discriminatory conduct affecting the retail distribution of electricity.(243)
1. Vertical Market Power
The primary mechanisms specifically addressed regarding vertical market power were the need for an independent system operator and a power market exchange. Beyond that, utilities were simply told to address the structural changes necessary to "clearly differentiate" generation, transmission, distribution and customer service in their required filings; and to provide "an effective means for preventing anti-competitive behavior."
2. Horizontal Market Power
The PPUC report, and the subsequent Pennsylvania legislation essentially focused on the need and authority of the PPUC to monitor and conduct investigations into potential market power abuses. This included assuring that the Commission could obtain documents and testimony from any electric supplier; could refer potential violations to the Attorney General, the DoJ, the SEC, or FERC; could intervene in any subsequent proceedings; and shall consider market power concerns in any proposed merger or acquisition before the PPUC. The legislation did specify that the Commission may permit, but shall not require, an electric utility to divest itself of generation facilities.(244) It also directed that the Commission shall encourage interstate power pools to enhance competition and establish independent system operators or their functional equivalents to operate the transmission system and interstate power pools.(245)
J. Rhode Island
The lead role on restructuring in Rhode Island was taken by the Legislature, which passed HB 8124 in 1996.(246) This legislation specified several different levels of action to mitigate market power.
1. Vertical Market Power
The primary market power remedy utilized was to require structural separation of generation, transmission and distribution into separate affiliates, and to establish a whole series of "standards of conduct" governing the behavior of employees of an electric distribution company regarding information and communication with affiliates and requiring separate books of account and access for Commission inspection.(247) The legislation also establishes a "Retail Electricity Licensing Commission" to license suppliers and to facilitate the creation of an ISO and a voluntary power exchange.(248) The legislation required each electric distribution company to file for review with the Commission by January 1, 1997, a plan for transferring ownership of generation, transmission, and distribution facilities into separate affiliates of the distribution company. Following complete implementation of the restructuring plans, electric distribution companies are prohibited from selling electricity at retail and from owning, operating, or controlling transmission facilities or generating facilities, although such facilities can be owned by an affiliate.(249)
In addition, the legislation provided a form of back-up protection from market power abuse by the distribution companies by requiring, through 1998, that any earned returns greater than 1.5 percent above currently allowed rate of return be 100 percent credited to customers through a refund factor.(250)
2. Horizontal Market Power
The legislation provided an additional interesting remedy that has the potential to affect both vertical and horizontal market power. It requires every wholesale power supplier receiving "contract termination fees" (essentially the Rhode Island term for stranded cost recovery compensation) to perform a type of "market valuation" through the divestiture of 15 percent of their interest in generating facilities. Furthermore, the requirement is tie-barred to requirements faced by the utility in any other state. If the power supplier is required to dispose of more than 15 percent of its interest in generation by any other state, that level of requirement shall apply in Rhode Island as well.(251)
K. Vermont
In Vermont there are two public agencies involved in utility matters: The Department of Public Service (DPS) which is a policy and advocacy organization, and the Vermont Public Service Board (VPSB) which is the quasi-judicial regulatory agency. The Vermont DPS expressed its concern about market power in a May 1996 technical report:
The primary impetus for restructuring the electric industry is the belief that competition can lead to lower prices and better service for all Vermont consumers. The keystone in the new environment is an open, fully competitive market for electricity in which producers can sell power at wholesale or retail. It is critically important to establish safeguards to assure that no particular company or group can dominate all or any part of the market, abuse market power through price fixing, charge predatory prices, set up barriers to entry, or in any way stifle competition.
Existing utilities have a competitive advantage over non-utility generators because they are vertically integrated, and because under cost of service regulation, they are usually able to recover their costs. As a result, a utility may be able to act in ways that favor its own generation assets over other options, even though the latter may be more economical. In order to assure that Vermont consumers have an opportunity to enjoy the potential benefits of a restructured and truly competitive market for electricity, the DPS recommends that utilities divest their generation assets and retail operations so that they are no longer affiliated.(252)
The VPSB in its Order on electricity restructuring identified certain actions to mitigate market power.(253) The specific actions called for focused on vertical market power.
1. Vertical Market Power
As an initial requirement, the VPSB called for a regional independent system operator and a power exchange.
For the regional generation market to operate fairly and effectively in a new competitive environment, it is essential that transmission facilities be controlled by a truly independent system operator ('ISO'), which will maintain overall system reliability, assure equal access to the grid, and take actions to prevent the exercise of market power by dominant providers. The ISO should also have responsibility for transmission pricing and planning. We also propose the establishment of a regional power exchange to provide a short-term spot market for energy services and other services necessary to support system reliability by the ISO.(254)
As for corporate structure, the VPSB stopped short of full divestiture, and ordered functional separation of generation and distribution into separate corporate subsidiaries, together with strict rules of conduct.
[We will] require Vermont's Largest Investor-Owned Utilities to Divide Their Generation and Distribution Functions into Separate Corporate Subsidiaries. This 'functional separation' of the companies into wholly-owned subsidiaries, with associated rules determining how they interact with each other, will prevent owners of essential bottleneck facilities (in this case, the wires) from exploiting those facilities to the advantage of their competitive affiliates. We do not propose full corporate divestiture at this time.(255)
2. Horizontal Market Power
The Vermont DPS, in its Technical Report, had the following to say regarding horizontal market power:
In addition, it is important to address 'horizontal' market power issues in the generation sector. Even if utilities were to divest all of their generation assets, there would still be a risk that a newly formed Genco might have a large market share, and could price its output higher than it would if the market was made up of a greater number of smaller Gencos. Therefore, in addition to the need for divestiture, regulators must ensure that Gencos do not exercise market power, such as through mergers that may create 'mega-gencos'.(256)
L. Conclusion
It is apparent from this review that these states which have taken early action on restructuring have had serious concerns about the market power of existing utility companies in their jurisdictions, and have taken a variety of actions intended to mitigate that market power. In the next section, this report takes a closer look at some of the market power related problems and pitfalls that could jeopardize the success of electric industry restructuring in Michigan.
VII. IMPLICATIONS FOR ELECTRICITY INDUSTRY RESTRUCTURING
It is expected that electric industry restructuring will result in greater efficiencies only if the generation market is truly competitive. However, most analysts agree that restructuring brings with it the very real potential for abuse of market power (and resulting increased prices) as well as increased litigation over antitrust violations. The concerns are exacerbated because in most instances, the proposed structures are untried. Without previous experience with the proposed structures, such as ISOs and competitive power exchanges, it can be difficult to identify all the ways in which market power could be abused or the system gamed to create unfair advantages. The resolution appears to involve three steps:
At this point in the restructuring process, it is important to limit the ways in which market power could be abused at both the retail and wholesale levels. While the FERC has jurisdiction over wholesale activities, it remains important for states also to take an active, visible position on wholesale issues since those decisions will impact state programs. The following issues are commonly recognized as potential problems for state commissions and deserving of serious consideration. To the greatest extent possible, these issues should be dealt with during the initial development of the structural framework for competition.
A. Stranded Costs
The issue of stranded cost recovery remains one of the major roadblocks to industry transition and perhaps one of the greatest problems facing state regulators. The FERC, having jurisdiction over wholesale transactions, has determined that electric utilities should have the opportunity to recover all legitimate, prudent, and verifiable wholesale stranded costs for contracts signed prior to July 11, 1994.(257) Additionally, the FERC has reaffirmed its decision to use a "revenues lost" formula for determining the level of recovery for wholesale transactions, and has determined that costs will be recovered through an adder on the transmission charges for those wholesale customers choosing to leave the system.(258) However, the FERC is only in the early stages of reviewing the first stranded cost filings. Therefore, there is little information available on how it plans to apply these standards. While FERC has jurisdiction over stranded cost recovery in retail-turned-wholesale transactions (municipalization), it does not have jurisdiction over the recovery of stranded costs resulting from all other retail generation, which falls within state jurisdiction.
The recovery of stranded costs brings with it the opportunity for abuse of market power. At the retail level, problems can result primarily if the amount of stranded cost approved for recovery is too high. Abuse could occur in two ways:
If it is determined by the state commission that a specific level of stranded cost recovery is appropriate, it can be argued that under-recovery of those costs by an incumbent, especially a small incumbent, might jeopardize its position in the market while benefiting the position of large entrants. While the possibility of this scenario may be remote, it should nonetheless be considered when determining if and to what degree stranded costs should be recovered.
The DoJ has stated that if stranded costs are to be recovered, they should be assessed on a competitively neutral basis. According to Melamed, a competitively neutral cost recovery mechanism is one that ". . . minimizes distortions of competitive choices by wholesale and retail customers. . .."(261) To meet this standard, a stranded cost recovery mechanism should:
A competitively neutral recovery mechanism might be a flat-fee surcharge on all electric bills regardless of whether the customer leaves the system or not. This surcharge could be placed in a special fund under the control of a governmental entity such as the public utility commission and distributed to utilities for servicing and retiring stranded cost debts.(262) This suggested cost recovery mechanism differs from FERC's decision on recovery of wholesale stranded costs and emphasizes different priorities.
The "Cajun" case raises another issue for regulators in considering stranded cost recovery mechanisms. In the Cajun v FERC, the U.S. Court of Appeals for the District of Columbia raised questions regarding the FERC's approval of Entergy's open access tariff, which included a stranded cost charge tied to transmission services.(263) The Court criticized the FERC for not holding an evidentiary hearing on this issue. Parties to the case agreed that Entergy's market power in generation resulted primarily from its "bottleneck monopoly" in transmission. This type of situation, the Court said, creates a classic tying arrangement, illegal under the Sherman Act. The FERC had found that Entergy's market power would be mitigated by implementation of Entergy's open access transmission tariff. However, the Court stated:
It follows that the question of whether Entergy's recovery of stranded investment cost precludes mitigation of its market power must be faced squarely by the Commission at this juncture. The provision of procedures to determine stranded investment cost on a case-by-case basis at a later date is no answer if the provision has a present anticompetitive effect. Assurances that stranded investment cost is legitimate, verifiable, and accurately calculated do not in themselves resolve whether the imposition of such production-related costs on transmission services precludes the mitigation of Entergy's market power.... What is inescapably before the Commission at this juncture is its validation of the concept of stranded investment, because -- not surprisingly really -- its view on this matter may itself dictate market structure. The Commission must address whether the TST's (transmission service tariff) provision of a process for recovery of stranded investment costs is itself a deal killer that, perhaps ironically, precludes genuine open access to Entergy's transmission system. In short, the question that must be asked now is whether the TST allows for 'meaningful access to alternative suppliers.(264)
While the Court's decision has been interpreted in various ways, the FERC expresses confidence that the Court's decision does not preclude it from adding stranded costs to transmission charges. However, the Court's message points out the close relationship between stranded cost recovery and the potential for abuse of market power.
B. Cross-subsidization
Cross subsidization is considered to be one of the most difficult problems to deal with in antitrust law, and promises to be a significant issue as states develop retail customer choice programs.(265) Basically, cross-subsidization involves the transfer of benefits or assets from one group to another. These benefits can involve either shared tangible assets such as employees, computer hardware, software or other equipment, or vehicles; or intangible benefits, such as trademarks, referrals, customer information, or mailing lists.(266) Cross subsidization can occur three primary ways:
Cross subsidization between regulated customer classes of the utility, while raising other concerns, is not a significant market power issue in the transition of the industry. However, both cross-subsidization during the transition and especially subsidization between regulated and nonregulated affiliates can distort the market and impair the emergence of competition, increasing the potential for abuse of market power.
Since in most instances retail competition will be phased-in over a period of years, incumbent utilities will continue to serve captive retail customers (for whom generation is still technically a monopoly market) while simultaneously competing for the business of those retail customers already participating in the market. This situation provides an opportunity, even an incentive, for utilities to subsidize competitive activities with revenues from captive customers.
In a similar manner, as traditional utilities enter the competitive world, they also may split off what have been traditionally regulated activities into nonregulated activities or affiliates, establishing new competitive enterprises. In addition to generation, other services such as marketing, meter reading, billing activities, and the provision of energy efficiency services and appliance repair services can be moved into operationally or functionally separate entities of the regulated industry. With the relaxation of PUHCA enforcement, restructuring provides utilities with an opportunity to explore nontraditional utility business opportunities such as telecommunications or to become active in international ventures. There is an inherent incentive for a utility to subsidize these competitive ventures with funds from captive, and generally inelastic, customers.
The issue of cross-subsidization leaves regulators with three problems. First, under traditional regulation, it has been difficult to identify costs that have been shifted to the regulated utility from the non-regulated affiliate if a commission does not have access to affiliate books and records. This problem is expected to intensify as the industry becomes more competitive, especially if Federal legislation does not clearly provide Federal and state regulators with access to the books and records of utility affiliates. It can be argued that all nonregulated generation market participants are able to subsidize generation costs with proceeds from other affiliated business activities. However, in most cases, the customers subsidizing the activity would have the option to select a new provider with lower prices. In a phase-in situation, the captive customers who would be subsidizing their utility's competitive activities would not yet have that option. Use of alternative ratemaking options, such as performance-based ratemaking with no cost-of-service baseline, unless carefully structured, could exacerbate this problem. Some have argued that phasing in retail competition will more effectively mitigate potential stranded costs, however, the opportunity to cross subsidize should be a consideration during the industry transition.
A second issue facing regulators, and one generating intense controversy in several states, is if, and if so how, should the assets be valued once a subsidy is identified? While regulators have experience assessing the value of tangible assets, most have little if any experience with intangible benefits. The issue is best demonstrated by example: in New York, Consolidated Edison changed the name of its marketing affiliate from ProMark Energy to Con Edison Solutions, and marketed its competitive generation as being associated with Con Edison.(267) The advertising went on to say, "With so many unfamiliar names out there, it's nice to know one thing stays the same. Con Ed Solutions...will still offer the unrivaled reliability of Con Edison itself." Utilities generally believe that trade names, logos, and other corporate identification are owned by the shareholders. New entrants tend to believe that use of the utility logo by an affiliate represents a type of affiliate subsidy giving the utility's affiliated marketer an advantage over other competitors. Others have suggested that this action could be considered a tying arrangement, illegal under Section 1 of the Sherman Act and Section 3 of the Clayton Act, since it gives the impression of tying the purchase of competitive generation to the regulated utility's reliability. Still others suggest that this is monopoly leveraging, that is, ". . . the use of monopoly power in one market to handicap or exclude competitors in another market."(268)
C. Transmission Capacity
The issue of transmission capacity weaves its way through most, if not all, electricity restructuring issues. As stated by Melamed:
Vertical integration in the same utility of generation and regulated monopoly transmission, however, creates an incentive and ability to impede open access . . . the vertically integrated utility has the ability and incentive to impede competition by favoring its own generators and otherwise restricting competitors' access.(269)
Open access to transmission is viewed as a key to the operation of a competitive electric market; as is sufficient available transmission capacity. Transmission related issues can raise market power concerns in at least three areas:
The FERC has taken the first steps in mitigating market power associated with transmission ownership by requiring transmission owning utilities to file open access tariffs for use in wholesale transactions. Unless there are demonstrated reasons not to, these tariffs are also to be used for the transmission portion of competitive retail transactions. However, it has become clear that open access tariffs alone will not completely mitigate market power exerted by transmission owning utilities.
A clear understanding of transmission system operations is crucial information to assess the geographic market in a market power analysis. Some state commissions have conducted detailed analyses of the incumbent utilities' transmission system and the potential for limiting or preventing access to the transmission system.
D. Joint Ventures
Interconnections and coordination agreements among public utilities have increased reliability and improved the economic and operational efficiency of utilities for many years. Such arrangements in a regulated, non-competitive environment pose few antitrust concerns. The transition to a competitive generation market, however, has brought with it concerns about the antitrust and anticompetitve implications of joint ventures, which can violate Section 1 of the Sherman Act and Section 7 of the Clayton Act. Joint ventures can be viewed as anticompetitive if they operate in an exclusionary manner, require an exchange of information, collaboration on the part of the members, or the sharing of information on strategic planning and coordination. They invite the opportunity for collusion, price fixing, and restraint of trade against non-participating competitors. Joint ventures have been viewed in a broad manner:
Almost any collaborative activity among business firms can be referred to as a joint venture. Under the current interpretation of the Sherman and Clayton Acts, however, a joint venture is generally understood to embody collaboration among business firms accompanied by some integration of resources, management, and risk.(271)
Hartwell points out that a joint venture ". . . may be a separate enterprise, formed by the joint venture partners or a contractual alliance or collaboration."(272)
InU.S.v Penn-Olin, the Supreme Court determined that the formation of a joint venture can violate Section 7 of the Clayton Act, whether the participants were in actual or potential competition with each other.(273) In its decision, the Court held that:
[t]he joint venture, like the "merger" and the "conglomeration," often creates anticompetitive dangers. It is the chosen competitive instrument of two or more corporations previously acting independently and usually competitively with one another.(274)
In Michigan, joint ventures among investor-owned utilities operating under a regulatory framework have increased reliability and efficiency. For example, Detroit Edison and Consumers operated a tight power pool, the Michigan Electric Coordinated System (MECS) for over 25 years. The MECS has been credited with improving reliability and operating efficiency for both companies. As the industry is transformed to a competitive wholesale market, the FERC required tight pools such as the MECS to file pro forma open access tariffs; to reform their power pooling arrangements establishing open, non-discriminatory membership provisions; and to rewrite the operating agreements to eliminate unduly discriminatory or preferential provisions. Detroit Edison and Consumers have filed the open access tariff, but have failed to reach agreement on revisions to the pooling arrangement.
Joint ventures between competitors may not violate antitrust law if they "(1) involve sufficient integration to create genuine efficiencies or (2) foster increased competition, for example by enabling the joint ventures to offer a new product or enter a new market."(275) Hartwell suggests that the best guidelines for establishing a joint venture are found in the DoJ/FTC Health Care Guidelines, which offer a 4 step analysis:
Two types of joint ventures are expected to play an important role in the competitive generation markets: ISOs and Power Exchanges or pools. Even with the antitrust concerns with joint ventures, properly structured ISOs and pools are viewed as a means to mitigate market power in a competitive environment. While the DoJ supports the development of regional transmission arrangements, such as ISOs, it warns that joint ventures must be carefully established and scrutinized to ensure that they are not structured or operated in an anticompetitive manner and that they do not prevent non-members from participating in the pool.
< The FERC has jurisdiction over the structure of both ISOs and power pools. However, the FERC's approval of these ventures, as well as other components of restructuring, does not carry the same immunity that state regulatory approval can bring under the State Action Doctrine.(277) Since the decisions the FERC makes will impact retail competition, the fact that the FERC has such jurisdiction does not mean state commissions should not play a role in the decision process wherever possible.
ISOs and power pools, however, are not the only types of joint ventures appearing as the electricity industry is restructured; the competitive environment offers utilities and their parent companies opportunities for growth and expansion beyond the traditional utility structures:
While each of these provide the opportunity for expansion of utility or affiliate business activities, they also provide opportunities for violating the Sherman or Clayton Acts, especially by restraining the trade of nonparticipating competitors.
1. Independent System Operators
Transmission access is a key to a competitive electric generation market. Most agree that, at least for the foreseeable future, transmission will be a monopoly. When a transmission owner is also a generation owner or affiliate of a generation owner, ownership of transmission must not allow the owner to exert market power over competing generators. Independent System Operators (ISO) are viewed as a method for mitigating the market power a transmission owning utility may be able to exert over competitors. ISOs are established to offer comparable, nondiscriminatory access to transmission systems to all users. Depending upon how the ISO is structured, it could also have oversight over planning new transmission, operating a power pool, or other similar responsibilities.
In Order 888, FERC recognized that many utilities are exploring the ISO concept, especially tight power pools that are considering restructuring proposals. FERC did not require any utility to form an ISO at the time of Order 888, but did encourage the development of properly structured ISOs and therefore offered guiding principles. In Order 888-A, FERC reaffirmed its commitment to ISOs as an effective way to comply with the comparability requirement of open access transmission service. In that same order the FERC also refused to modify its ISO principles. They are:
2. Power Pools/Power Exchanges
Power pools, a specific type of joint venture, are not new; PURPA encouraged the development of pools and there are many throughout the country, each operating with varying degrees of "tightness."(279) Pools administer the purchases and sales of energy and capacity services. (As mentioned previously, Consumers and Detroit Edison jointly have operated the MECS, a "tight" pool for over 25 years.) In a regulated environment, pools have allowed utilities to improve reliability and jointly balance operations, loads, and purchases. As the industry becomes more competitive and generation pricing is deregulated, the role of a pool may shift to allow the development of larger, centralized spot markets for bulk power.(280) There are several models for pools. In most models, generators bid power into the pool and buyers (generally distribution companies) bid to purchase the power from the pool.
Pools are viewed by many, including the DoJ, as an important component of a competitive wholesale electric generation market; not as a participant in the market, but as a marketplace, similar to the New York Stock Exchange.(281) Bingaman, the former Director of the Antitrust Division, has said:
We see a Poolco, with proper safeguards in place and under appropriate market conditions, as a potentially efficient allocator of electric energy, in effect de-integrating the industry by economically separating production from transmission and distribution.(282) (emphasis added)
The primary criticism of the pool model involves the concern that, although a market is created, it is not necessarily a competitive market. The pool model invites opportunity for leveraging by participating generators.(283) For example, if there are too few generators selling into the pool -- a situation which might occur if there are transmission constraints -- sellers would be able to take advantage of pricing mechanisms to raise the price. This could be a significant problem in states like Michigan in which incumbent utilities have market concentration and there are transmission constraints. Some generating companies might possess enough market power in a region to allow them to raise the bids above competitive prices. This occurred recently in Great Britain's generation market, which had only two power producers.(284) Therefore, it is important that those bidding into the pool not possess market power for that pool, or that any market power has been satisfactorily mitigated. Additionally, other factors impact the competitiveness of the pool and should be considered during pool development. Market shares of incumbent utilities, entry conditions, and transmission constraints could indicate the need to increase the geographic size of the pool.(285)
Open and sufficient transmission access will be a mitigating factor. Some suggest that the use of bilateral contracts would be another method to introduce additional competitive opportunities into the market, thus helping to mitigate the market power that a large seller could use on the pool.(286) These contracts would allow retail and wholesale customers to make direct financial arrangements with generation suppliers, thereby allowing greater customer options. However, bilateral contracts present a potential problem. Depending on how the contracts are negotiated, large customers may be able to lock in the most attractive generation agreements, in essence, "cream skimming." Smaller customers with less purchasing power could be left to purchase from the pool at rates that might be less attractive, particularly if the pool is dominated by a couple of large suppliers. Similarly, to the extent that these contracts encumber available transmission capacity, early contracting parties may effectively close out later comers due to transmission constraints.
While the FERC holds jurisdiction over approval of pools, the issue is important to state commissioners. Retail customers may be served, directly or indirectly, from pools, and at least some of them, for the next several years, will be captive retail customers of the incumbent utility. Therefore, state commissions would benefit from taking an active role in the formation of the pools and ensuring that any potential for abuse can be mitigated.
E. Mergers and Acquisitions
Section 7 of the Clayton Act states that mergers and acquisitions are prohibited from substantially lessening competition, raising prices, or reducing service. As the industry is restructured, merger and acquisition activity has steadily increased. As has been discussed previously, while the FERC plays the major role in reviewing mergers, DoJ also reviews mergers and provides comments to the FERC. DoJ provides these comments on mergers:
States without jurisdiction to approve or deny mergers will be dependent on the FERC to ensure retail market power issues are considered in the evaluation of a merger. However, there are steps state commissions can take to ensure that mergers and acquisitions are not anti-competitive:
F. Special Contracts
Special retail contracts have been recognized as a method for a utility to be competitive in the generation market and to retain valuable load and thereby protect existing investment in generation plant. Many state commissions have approved special contracts with discounted rates when a utility's customer has had competitive options, thus avoiding a situation in which the remaining captive customers absorb what otherwise might be stranded costs. Some of these contracts, however, are designed to lock customers in to long-term commitments, forestalling competition and discouraging new entrants from entering the market.
The pricing in some contracts may be considered predatory or discriminatory and a violation of the Robinson-Patman Act. In such instances, as a prerequisite for these contracts receiving immunity granted by the State Action Doctrine, approval should be based on a clearly articulated policy of the state and reviewed and approved on a case-by-case basis by the state commission.(288) While these contracts are subject to state review and have been encouraged, in general, by state agencies, they may not always be approved on a contract-by-contract basis. Accordingly, unless special contracts are approved individually, they may not satisfy the second prong of the test for state action immunity.
G. Territorial Allocations
The allocation of territories is a violation of Section 1 of the Sherman Act, except when those allocations are immune from claims of antitrust violations based on application of the State Action Doctrine. That is, when the allocation method is the result of an affirmative state policy overseen by the state regulatory commission. As the generation market becomes competitive and retail customers are granted choice, questions arise about the use of traditional franchises.
In Michigan, the State Constitution grants local units of government the authority to control the use of their streets and to grant utilities the franchise to conduct business within the local government's boundaries.(291) If all generators are considered public utilities and thus are required to obtain a Certificate of Convenience and Necessity from the Commission, they will also need franchise approval from the local unit of government.(290) Since franchise approval is a clearly stated policy of the Legislature, state action immunity would appear to protect the franchise holders from claims of Sherman Act violations. But problems could occur if, for example, a local unit of government did not provide equal treatment to all franchise applicants. This issue warrants further study.
H. Barriers to Entry:
For competition to be bring about greater efficiencies and lower costs, there must be a variety of competitors operating in the market place. Barriers to entry prevent or hinder competitors or potential competitors from participating fully in the market. Barriers can be established by the rules or guidelines of the restructuring framework, by either the regulators or the legislature; or by the incumbent utility exerting existing market power through the ownership of transmission. For competition to bring about greater efficiencies and lower costs, there must be a variety of competitors operating in the market place.
Government imposed barriers might include unreasonable licensing fees or bonding requirements. While these same requirements also may protect customers to some extent, they could also restrict competition. A second class of barriers results directly from the actions of the market participants. These might include inadequate transmission capacity, which would prevent competitors from delivering power to customers.
Barriers can include:
VIII. CONCLUSION AND RECOMMENDATIONS
In order for competition to effectively achieve the goal of a more efficient electricity market, opportunity for the abuse of market power must be mitigated to the greatest extent possible. By all accounts, the most productive means of doing this is to pursue a proactive strategy, structuring the transition in such a way so as to avoid or minimize the potential for abuse from the outset, rather than trying to correct market power problems after abuses have already occurred. This issue is of considerable importance because Michigan's regulated utilities currently possess significant market power. This stems from such factors as their:
Given this level of market power, mitigating steps will need to be taken if true and robust market competition is to be established. As previously stated, complex as the issues are, it is more effective to deal with market power during the transition to a competitive retail market than to try to rectify the problems after the fact, generally through protracted, costly litigation.
Deregulating the generation sector of the electric industry is easy. Restructuring the industry so that the end result works to the benefit of all, will be difficult. Considerable planning and foresight will be required to establish a workably competitive electric power market in Michigan -- a robust market consistently delivering reliable, low-cost power to all Michigan businesses and households. Given the specific characteristics of the industry in Michigan, market power is a potentially serious problem. A proactive response is warranted if competition is to succeed. Market power cannot be allowed to stand in the way; otherwise the result of restructuring could create an unregulated monopoly, an outcome considered by most to represent the worst of all worlds.
IX. RECOMMENDED MARKET POWER MITIGATION ACTIONS
(1) Establish a clear separation of regulated business operations from generation and other competitive enterprises and assure Commission access to utility and relevant affiliate books and records. This is absolutely essential if a competitive market is to succeed. The most direct and effective solution would be to arrange for the actual divestiture of at least a significant portion of existing utility generation. If this is not desirable or feasible for other reasons, then, at a minimum, there must be a carefully designed structural separation between competitive and non-competitive operations, with clear rules and strong regulatory oversight in order to prevent discrimination, cross subsidization or other market power abuses. Commission access to utility and relevant affiliate books and records as necessary to prevent and investigate charges of market power abuse must be assured.
(2) Conduct an independent, objective study, on an expedited time line, of the current transmission system transfer capabilities, to include assessment of bottlenecks and expansion upgrade opportunities. The transmission grid is the infrastructural backbone crucial to the support of a competitive power supply market. Limited available transfer capacity of the transmission system, especially during peak usage times, has been identified as a significant market power concern. A credible and sufficiently detailed information base, supporting a better understanding of system capability and upgrade potential, is needed. It would be an invaluable asset in efforts to address mitigation concerns.
(3) Create a large and truly independent ISO with full participation by Michigan utilities. Most national observers consider this an absolutely essential element of any acceptable restructuring plan; a conclusion firmly supported by public comments received on the draft of this report. Efficient movement of power dictates that an effective ISO be geographically large with many diverse participants enjoying full access at fair and non- discriminatory prices, terms and conditions. Concerns about potential "balkanization" of the transmission grid suggest that ample size is critical to effective coordination of expansion planning and avoidance of rate pancaking.
(4) Require that all direct access contracts be filed with the MPSC and publicly disclosed until a vibrant spot market emerges or is created. Price transparency is important to an efficient competitive market. Widespread disclosure of pricing information will be important, especially to smaller, less sophisticated customers and suppliers during the transition period as the market is developing. Well informed participants will help to jump start competition and, to some extent, make a contribution to the overall market power mitigation effort.
(5) Create the necessary structural and institutional mechanisms, including the required legal authority where needed, to establish effective regulatory oversight that will be essential to the creation and maintenance of a properly functioning competitive market for electricity in Michigan. This would include the capability to monitor and enforce standards of conduct in areas such as open access to the transmission grid, cross subsidization, predatory pricing, collusion, and the authority to take necessary action on various consumer protection issues. The capability to thoroughly investigate violations along with the authority to enforce penalties (such as fines) should be established as viable means to maintain and strengthen competition.
(6) Establish a "code of conduct" governing the relationship between utility companies and their affiliates vis-a-vis power supply competitors. The ground rules for creation of a competitive power supply market must be clearly formulated to prevent utility corporate self-interests from being unfairly advantaged in any way as a result of their control of transmission or distribution systems. Full capability to monitor and enforce appropriate conduct should be provided. Several parties submitted comments on the draft report strongly advocating development of a code of conduct strictly governing utility dealings with their affiliates vis-a-vis competitive power suppliers.
In several recent orders beginning with U-11220, SEMCO Energy Gas Company (October 29, 1997), the Commission has approved standards of conduct intended to promote fair competition and a level playing field among all participants involved in gas transportation. SEMCO Energy's standards are accompanied by an explicit complaint process for code violations. The gas standards, combined with suggestions from parties and a review of codes of conduct in other states would be a good starting place for development of a code of conduct for electric utilities. The text of SEMCO Energy's "Transportation Standards of Conduct" is attached as Appendix B.
(7) Require the development of a detailed implementation strategy to significantly increase the availability of competitive supply sources to direct access customers from suppliers other than Detroit Edison and Consumers Energy or their affiliates. In the near term, these increased supply options can be contributed through expansion of transmission capacity to enhance import capability from power suppliers outside Michigan, through divestiture of utility generation or a combination of the two. In time, new in-state generation sources from non-utility suppliers may be brought on-line to meet future market growth or replace retired incumbent utility generation facilities. Plans should be developed promptly to enable implementation to coincide with the transition period, such that when full access is granted in Michigan ample opportunities are readily available, providing customers with timely choices. Without supply options, choice has no meaning and competition is surely destined to fail. Thus, it is not surprising that the perceived need to expeditiously address limited supplier competition, resulting from current supply dominance by incumbent utilities, resonated loudly among many stakeholders voicing their market power concerns to Staff.
APPENDIX A
PUBLIC COMMENTS ON DRAFT INTERIM MARKET POWER PAPER
Comments were received from a total of 17 parties and citizens. A majority of the comments supported Staff's preliminary understanding of market power issues, and many of the mitigation measures Staff identified for possible consideration. Generally, all of the mitigation options identified by Staff were supported by a majority of the commenting groups, with the single exception of the power exchange concept.(293)
Many comments praised the Draft Interim Report, calling it "helpful and educational", an "excellent first attempt at defining the market power issue", a "thorough and well-reasoned review", and an "outstanding job of identifying the starting point in creating an environment in which true generation open access can develop and thrive". Two parties indicated they thought the report should be required reading for state legislators prior to the passage of restructuring legislation. Another recommended that staff simply declare the interim report to be the final one, and immediately present it to the Commissioners.
Nevertheless, some differences in the positions of the various parties were evident in the comments. The most strident opposition to the report came from Detroit Edison. The company found many problems with the report's assumptions and recommendations. Consumers Energy urged the Staff to "move beyond a general theoretical discussion" and to provide "specific 'how-to' information" to support the Commission's implementation process."
Table A provides an index of all of the comments received. Table B reflects the major themes presented in the comments. Highlights from the comments include:
Several themes were repeated by many of the parties. These included:
Several of the parties raised important issues, in addition to those shown in the summary table. These included:
Some of the comments were narrowly focused, sometimes on single issues. They were not incorporated into Table B. These included the Michigan Alliance for Fair Competition (MAFC), MCV, Thumb Electric, WEPCo, Wolverine, and Mr. Wotta (a private citizen, and residential customer of Detroit Edison and a seasonal residential customer of CECo). Here are brief highlights of those parties' positions:
Detroit Edison's comments revealed the harshest opposition and criticism of the report. In a nutshell, Detroit Edison restated its belief that market power will not be a problem with its proposal for industry restructuring in Michigan and that no immediate regulatory actions are needed to prevent market power from developing into a problem. Though Staff concentrated on well known mitigation measures that are already being employed in several other states, in addition to foreign countries, Detroit Edison characterized many of those measures as unwarranted and extreme.
Detroit Edison's comments belittled the concern for monopoly power, but also ignored the issue of oligopoly power. Detroit Edison stated that ample competitive supply resources will be available to meet the demands of the proposed phase in schedule, but these comments did not address Michigan's significant transmission constraints. Detroit Edison stated that reciprocity provisions would reduce market power concerns. Detroit Edison reasoned that the opening of interstate markets "will stimulate transmission investment", and that cross-state energy trading will "virtually" reduce transmission constraints. While these are theories that deserve analysis, Staff remains skeptical that either or both will be sufficient to reduce market power concerns in the relevant time frame.
Some parties noted the need to update the Staff report to incorporate new information and events that have transpired since this draft was finished (in May, 1997). Staff has done that in the preparation of this report.
In general, Staff found the public comments to be insightful and helpful. In order to adequately address some of the issue areas identified, significant additional investigation will be required. For example, several parties specifically mentioned the need for detailed analyses of ISO options, a comprehensive transmission study, and development of a code of conduct for utility providers.
TABLE A: INDEX OF COMMENTS
| Date Received | Party | #Pages | Attachments / Appendixes |
| 12/01/97 | Association of Businesses Advocating Tariff Equity (ABATE) | 2 | none |
| 12/01/97 | Competitive Utility Tariffs, Inc. (CUT) | 7 | "Competitive Energy: Increasing Michigan's Competitive Position for the 21st Century" by Richard Vander Veen (69 pp). |
| 12/04/97 | Consumers Energy (CECo) | 4 | none |
| 12/01/97 | Detroit Edison (DECo) | 6 | "Review of Staff Draft Interim Discussion Paper" by Rodney Frame, V.P. of National Economic Research. Associates, Inc. (10 pp). |
|
12/01/97 |
Energy Michigan | 13 | News service article about Michigan deregulation (2 pp). "Electric Power Transfer Adequacy in the State of Michigan: Transmission Issues in a Competitive Market" by MSB Energy Associates (27 pp). Proposed Standards of Conduct to Govern Electricity Distribution Companies in their Relations with Competitive Affiliates (3 pp). |
| 12/03/97 | Lansing Board of Water & Light (LBWL) | 1 | none |
| 12/01/97 | Michigan Alliance for Fair Competition (MAFC) | 2 | Proposed Standards of Conduct for Electric Deregulation Legislation (1). |
| 12/01/97 | Michigan Electric & Gas Assoc. (MEGA) | 2 | none |
| 12/09/97 | Michigan Independent Power Producers Assoc. (MIPPA) | 5 | none |
| 12/02/97 | Michigan Municipal Electric Association (MMEA) | 1 | none |
| 12/01/97 | Michigan State Utility Workers Council (UWC) | 5 | Multiple attachments, approximately 20 documents (175 pp). |
| 12/02/97 | Midland Cogeneration Venture Limited Partnership (MCV) | 3 | none |
| 12/01/97 | Region II Community Action Agency (CAA) | 3 | none |
| 12/01/97 | Thumb Electric Cooperative (Thumb Electric) | 2 | none |
| 12/12/97 | Wisconsin Electric Power Co. (WEPCo) | 4 | none |
| 12/01/97 | Wisconsin Public Service Corporation (WIPSCo) | 6 | none |
| 12/01/97 | Wolverine Power (Wolverine) | 2 | none |
| 12/01/97 | Wotta, Mr. Robert S. | 1 | none |
TABLE B: INDEX OF THEMES
Blank cells indicate the party did not specifically address that issue or recommended action; it does not imply the party does not support that position. The indication "no" is used if the party specifically opposed an issue or recommended action.
ISSUE PARTY |
Issue is critical to restructuring success | Take actions to mitigate & prevent market power before restructuring | Support Suggested Mitigation Strategies | ISO needed | Transmission Upgrades Study | Divestiture | Other |
| ABATE | yes | yes | yes, as mentioned | yes, regional | yes | yes | |
| CAA | yes | yes | yes | yes | yes | yes | assure consumer education |
| CUT | yes | yes | yes, regional | yes | yes | public education
& full information disclosure, new legal authorities for MPSC |
|
| CECo | no, gradual transition mitigates market power | yes, when further refined | details needed | no | standards of conduct needed | ||
| DECo | no state regulatory action warranted | no, gradual transition mitigates market power; DoJ & FTC will take any actions needed | no, except for ISO | yes | no | reciprocity needed | |
| Energy Michigan | yes, but Staff recommendations don't go far enough | yes, regional | yes (consultant report attached) | yes | added capacity needed now; code of conduct; does not support power exchange | ||
| LBWL | yes | yes | |||||
| MEGA | yes, during transition period | "worthy of examination" by MPSC | yes, regional | yes | new legal authorities for MPSC | ||
| MIPPA | yes, regional | encourage renewable energy; reduce CPCN & local franchise requirements | |||||
| MMEA | yes | yes | yes, except power exchange | need more info about power exchange before support | |||
| UWC | threshold benefit/cost question prior to restructuring | yes | yes, check benefit/cost of upgrades | no, use functional separation | code of conduct; customer information; reciprocity | ||
| WIPSCo | yes | yes: avoid problems from the start | yes | yes | yes | yes | code of conduct |
APPENDIX B
SEMCO ENERGY GAS COMPANY
Case No. U-11220, October 29,1997
TRANSPORTATION STANDARDS OF CONDUCT
This rule is intended to promote fair competition and level playing field among all participants involved in transportation within SEMCO ENERGY Gas Company's (the Company) regulated service territory. The Company will conduct its business to confirm to the following standards of conducts:
1. The Company will apply any tariff provision relating to transportation service in the same manner without discrimination to all similarly situated persons.
2. The Company will not give its marketing affiliate or customers of its affiliate preference over non-affiliated gas marketers or their customers in matters relating to transportation service including, but not limited to, nominating, balancing, metering, billing, storage, standby service, curtailment policy or price discounts.
3. The Company will not communicate to any customer, supplier or third parties that any advantage may accrue to such customer, supplier, or third party in the use of the Company's services as a result of that customer, supplier or third party dealing with its marketing affiliate and shall refrain from giving any appearance that it speaks on behalf of its affiliate.
4. The Company will process all similar requests for transportation service in the same manner and within the same period of time.
5. If a customer requests information about marketers, the Company will provide a list of all marketers operating on its system, including its affiliate, but will not promote its affiliate.
6. To the extent the Company provides to its marketing affiliate a discount or information related to the transportation, sales or marketing of natural gas, including but not limited to the Company's customer lists, that is not readily available or generally known to any other marketer or supplier, it will provide details of such discount or provide the information contemporaneously to all potential marketers on its system that have requested such information.
7. The Company will not condition or tie its agreement to release interstate pipeline capacity to any agreement by a gas marketer, customer or other third party relating to any service in which its marketing affiliate is involved.
8. The Company will not condition or tie an agreement to provide a transportation discount to any agreement by a marketer, customer or other third party relating to any service in which its marketing affiliate is involved.
9. The Company's operating employees and the operating employees of its marketing affiliate will function independently of each other, be employed by separate corporate entities, and maintain separate business offices.
10. The Company will keep separate books of accounts and records from those of its marketing affiliate.
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FOOTNOTES
1. .Electric Utility Week; "Economist Suggests 'Level Playing Field' a Pipe Dream in New Markets;" December 1, 1997, p. 11; citing presentation by William Shepherd, University of
Amherst.
2. See, for example, Kuttner, Robert; Everything for Sale: The Virtues and Limits of Markets; New York, 1997, Chapter 7.
3. Tonn, Bruce; Eric Hurst, and Douglas Bauer; Public-Policy Responsibilities in a
Restructured Electricity Industry; Oak Ridge National Laboratory, Oak Ridge, Tennessee;
ORNL/CON-420, June, 1995, p. 31.
5. Fox-Penner, Peter; Electric Utility Restructuring; Public Utilities Reports, Inc.; Vienna, Va.,
1997, p. 242.
6. Frankena, Mark W., "Prepared Testimony of Mark W. Frankena Before the Public Service
Commission of Nevada;" January 31, 1997, p. 5.
9. id., [emphasis in original].
10. id., [emphasis in original].
12. Shepherd, William G.; The Economics of Industrial Organization (Third Edition); Prentice
Hall, Englewood Cliffs, N.J., 1990, Chapter 15.
13. California Public Utilities Commission, "Status Report on Market Power to the California
State Legislature;" March 19, 1997, p. 6.
14. The litany of horizontal market power problems includes outright or tacit collusion, cartel
behaviors, price leadership, umbrella pricing, etc. See Shepherd, supra., Chapters 13 & 14.
15. Fox-Penner, supra., p. 243.
17. Biewald, Bruce E., David E. White, and William Steinhurst; "Horizontal Market Power in
New England Electricity Markets: Simulation Results and a Review of NEPOOL's Analysis, Prepared
for the New England Conference of Public Utility Commissioners;" June 11, 1997, pg. 4, citing a
study by Leonard Weiss.
19. Due to the physical attributes of electricity and the infeasibility of storing it in large
amounts, it is necessary to maintain an equilibrium between supply and demand in order for the
system to operate.
20. Frankena, 1997, supra., p. 10, citing the "Analysis of Load Pockets and Market Power in
New York State: Final Report;" New York Public Service Commission Case 94-E-0952, October 1,
1996, Appendix A.
21. Biewald, White, and Steinhurst, supra p. 5.
22. Frankena, 1997, supra. p. 18.
23. Selwyn, Lee L.; "Market Failure in 'Open' Telecommunications Networks: Defining the
New 'Natural Monopoly';" Utilities Policy, Vol. 4, No. 1, January 1994, pp. 21-30.
24. id., p. 21. [Emphasis in original.]
25. Edison Electric Institute; Statistical Yearbook of the Electric Utility Industry - 1995;"
Washington, D.C., 1997, p. 58.
26. Coulton, Roger D.; The Interexchange Telecommunications Industry: Should Regulation
Depend on the Absence of Competition? Boston, Mass., National Consumer Law Center; 1989,p. 7.
29. Brennan, Timothy J., Karen L. Palmer, Raymond J. Kopp, Alan J. Krupnick, Vito
Stagliano, and Dallas Burtaw; A Shock to the System: Restructuring America's Electricity System;
Resources for the Future; Washington, D.C.; 1996; p. 21.
32. Energy Information Administration, U.S. Department of Energy; The Changing Structure
of the Electric Power Industry: An Update; December, 1996.
33. Greenberger, Leonard; "The PUHCA: Busting the Trusts;" Public Utilities Fortnightly;
March 15, 1991; pp. 20-23.
36. Brennan, et al., supra., p. 23.
38. Fox-Penner, supra., p. 107.
39. Brennan, et al., supra., p. 23.
42. Hempling, Scott; "Electric Utility Holding Companies: The New Regulatory Challenges;" Land Economics; August, 1995; pp. 343-353
44. Greenberger, supra., 1991.
45. Public Utilities Commission of Rhode Island v Attleboro Steam and Electric Co., 273 US 83; 47 S Ct 294; 71 L Ed 549 (1927).
51. Michigan Public Service Commission Statistical Analysis Section data, 1997.
52. Federal Energy Regulatory Commission;
"Promoting Wholesale Competition Through Open
Access Non-discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by
Public Utilities and Transmitting Utilities," (Order 888), issued April 24, 1996, 18 CFR Parts 35 and 385,
and, on rehearing, "Promoting Wholesale Competition Through Open Access Non-discriminatory
Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and
Transmitting Utilities," (Order 888A), issued March 4, 1997, p. 26. 54. An EWG is "any person determined by the Federal Energy Regulatory Commission to be
engaged directly, or indirectly through one or more affiliates . . . exclusively in the business of
owning or operating, or both owning and operating, all or part of one or more eligible facilities and
selling electric energy at wholesale." (15 U.S.C. 79z-5a) 56. Adopted by The National Association of Regulatory Utility Commissioners, July 25,
1996, and published in the "NARUC Bulletin;" August 5, 1996. 58. Chessler, David; Determining When Competition is "Workable": A Handbook for State Commissions Making Assessments Required by the Telecommunications Act of 1996; Columbus Ohio: National Regulatory
Research Institute, NRRI 96-19, July, 1996, pp. 17-18. 59. Energy Modeling Forum; "A Competitive Electricity Industry;" EMF Report 15, Volume 1. Stanford
University, Stanford, California, April, 1998, p. 6. 60. Several states have conducted studies on the existence of market power in the emerging competitive
electricity industry. For example, in New York, the "Statewide Load Pocket Study" was conducted by staff of the
New York Power Pool and its Transmission Planning Advisory Subcommittee under the direction of the New York
Power Pool Planning Committee with the participation of the New York State Department of Public Service (1996).
Biewald, White, and Steinhurst prepared a report, "Horizontal Market Power in New England Electricity Markets:
Simulation Results and a Review of NEPOOL's Analysis" (1997). Frankena prepared testimony on behalf of the
staff of the Public Service Commission of Nevada analyzing market power issues raised by proposals to restructure
the electricity industry (1997). Sweetser has written "An Empirical Analysis of a Dominant Firm's Market Power in
a Restructured Electricity Market, A Case Study of Colorado" (1998). The California Public Utilities Commission
has written the "Status Report on market Power to the California State Legislature" (1997). 63. HHI is equal to the sum of the squares of market share, measured as a percentage. Each
firm's market share, in percent, is squared and then the total for the industry is reported. A pure
monopoly would involve one firm having 100% of the relative market, for an HHI score of 1002, or
10,000. HHI approaches zero as the number of competitors increases and their market shares
decrease. For example, in a market with 100 firms, each holding 1% of the market, the HHI would
equal 100. HHI's higher than 1800 are generally considered to be indicative of potentially serious
market power problems. If a single firm holds more than about 40% of a market, then the HHI for
that single firm would be large enough to warrant market power concern. (That is, the square root
of 1800 is 42.4.) 64. Landes, William M. and Richard A. Posner; (1981, March); "Market Power in Antitrust
Cases," Harvard Law Review; Vol. 94, No. 5, pp. 937-996. 65. Picard, Robert G.; Concentration/Market Power Measures; California State University, Fullerton; Fullerton, California, http://www5.fullerton.edu/titan/commecon/Concentration.html. 66. Felder, Frank A. and Steve R. Peterson; "Market Power Analysis in a Dynamic Electric Power Industry;" Electricity Journal; 1997, Vol. 10, No. 3, pp. 12-19. 67. According to Frankena, a product is considered to be a relevant product market ". . .if a sole supplier
would have the ability profitably to raises (sic) prices by a small but significant amount, typically assumed to be 5
percent, above competitive levels for a significant period of time." The key factor, as Frankena points out, is whether customers would respond to the increase in price by switching to other products (e.g. to natural gas from electricity or to interruptible service from firm service), thus making the price increase unprofitable.
An area is considered a geographic market if "... a hypothetical monopolist would have the ability profitably to raise prices of the relevant product to customers in that area by a small but significant amount relative to prices charged to customers elsewhere. Generally, in the electric industry, relevant geographic markets are defined by transmission constraints. 69. For example, in considering the competitive market for electric power sales in Michigan,
should the relevant question be: (a) What capacity is available at any price?; (b) What potential
competitors can offer market-rate power to large utility customers for the next 5-10 years? (c) How
much market-rate power can be made available during summer peak load periods?; etc.? 71. Chessler, 1996, supra., pp. 19-20., 72. Chessler, 1996, supra. p. 5. 74. When reviewing mergers, DOJ and FERC are concerned with the absolute measure of
HHI and also with the change in HHI that would occur if a proposed merger is approved. 75. A commenter on the draft interim report recommended additional HHI analyses, separating the Upper Peninsula (U.P.) from the Lower Peninsula (L.P.). The UP has only about 1300 MW (6%) of in-state capacity and also about 6% of statewide electricity sales. Clearly, separate HHI analyses for the two peninsulas would depict even more L.P. market concentration. By itself, the U.P. would have an HHI of roughly 4400, dominated by a single utility (Wisconsin Electric Power
Co.), which controls about 2/3 of U.P. capacity. Thus, concentration of ownership of generation is a concern for
each peninsula, independent of the other. Staff expects the same types of mitigation measures will be applicable to
both peninsulas. Because Staff's purpose for showing HHI analyses in this paper is purely for general illustration purposes, Staff has not provided separate HHI models. The point is generally understood, however, that current transmission
capacity across the Straights of Mackinac is quite limited. Thus, the two Peninsulas are effectively divided into two
separate markets at this time. The U.P. is more strongly interconnected to Wisconsin, and will likely become part of
an ISO to the west. Two of the U.P. utilities, Upper Peninsula Power Co. (UPPCo) & Edison Sault Electric Co. (Edison Sault) are presently merging with larger utilities to their west. UPPCo has agreed to merge with Wisconsin Public Service, and Edison Sault with Wisconsin Electric Power Co (WEPCo). The FERC approved the Edison Sault merger in April, 1998. 76. The baseload import capability for Michigan as a whole is estimated to be about 5000 MW, but during
times of peak load in recent years all (or very nearly all) of the available transmission capacity has been in use. (See:
Consumers Energy Company, March 7, 1997, Case No. U-11290: Response of Consumers Energy Company to
Commission Request for Information, Question 7, pp. 29-30, Appendix 5, especially p. 7; and, The Detroit Edison
Company, March 7, 1997, MPSC Case No. U-11290: Informational Filing on Implementation of the Staff's Report,
Chapter 7, especially pp. 20-23). Therefore, the 5000 MW estimate is very optimistic. Some observers maintain that
ATC for Michigan's Lower Peninsula should be modeled at zero or close to zero, reflecting the limitations on peak
load transfer capability. Table 3 (p. 44) shows a scenario with zero ATC, resulting in an HHI of about 3300. 77. Depending upon the assumptions used regarding CECo's control of MCV, affiliated NUGs, and
interstate transmission capacity, Michigan's HHI varies from a low of about 2100 to as high as 4590. It makes very
little difference to the aggregate HHI score whether the index measures market share based on the number of
customers, total sales to customers, total sales to industrial customers, or amount of generating capacity owned.
HHI's from each of these various perspectives range from about 3200 to 3500. In both of the tables shown here, a highly optimistic assumption has been used to model the concentration
of control (i.e. ownership) in the categories of "Other NUGs & IPPs", "All Others (muni's, coop's, other utilities)",
and "Import Capability". For each of those categories, HHI scores were calculated as if there were 20 separate
entities, each controlling an equal market share. For example, Table 1 shows that "Other NUGs & IPPs" represent
5% of the Michigan market, rounded up from 4.655%. The HHI score for that category was calculated by dividing
the 5% by 20, assuming each firm controlled only 0.23% of the total market. Squaring the 0.23% yields an HHI
score for each of the 20 firms of about 0.05, and multiplying that score by 20 firms results in the HHI score of 1 for
that category. Market concentration in each of these areas could be significantly greater than was modeled. If so, the
HHI scores depicted for each of the three scenarios shown are somewhat lower than actual. Any change in the
number of existing and new competitors would trigger corresponding changes in the HHI scores. The reader should also note that the HHI in Table 1 shows a Michigan market of 28,300 MW, and Table 2
shows 33,300 MW. Both are substantially larger - roughly 1/3 and 2/3, respectively - than the Michigan market
today, which is much closer to the 23,300 MW shown in Table 3 (p. 44). 78. Arreda, Phillip, and Donald E. Turner; Antitrust Law Volume 1; (Little Brown & Co.,
1978), p 8. 79. Meeks, James E.; Antitrust Concerns in the Modern Public Utility Environment; National
Regulatory Research Institute, (1996) pp 14-15. 80. Meeks, James E.; "Economic and Legal Foundations of Antitrust and Merger Policy and
Their Application to Utility Industries;" Presented at the "Antitrust, Merger Guidelines, and
Regulation of Utility Consolidation Conference," sponsored by the Institute of Public Utilities,
Michigan State University, November 6, 1996, citing Brunswick Corp. v Pueblo Bowl-O-Mat, Inc.,
429 US 477, 973 S Ct 690, 50 L Ed 2d 701 (1977). 81. Perl, Lewis J.; Section: Symposium: Antitrust, Joint Ventures, and Electric Utility Restructuring: Measuring Market Power in Electric Generation, 64 Antitrust LJ 311 (1996). 82. Trotter, Donald T.; "Antitrust Issues and Application to the Electric and
Telecommunications Industries;" Presented at the 38th Annual NARUC Regulatory Studies Program,
Michigan State University, East Lansing, Michigan; August 7, 1996. 84. Macey, Daniel; "Energy Trustbusting;" Megawatts Market; Fall, 1996, p 30. 85. Otter Tail Power Co. v US, 410 US 366; 93 S Ct 1022; 35 L Ed 2d 359 (1973). 86. Keough v Chicago & N.W. Ry. Co., 260 US 156; 43 S Ct 47; 67 L Ed 183 (1922) and Square D Co. v Niagara Frontier Tariff Bureau, 476 US 409; 106 S Ct. 1922; 90 L Ed 2d 413
(1986), cited by Hochberg, Jerome A., "Interface Between Traditional Regulation and Antitrust
Enforcement as the Regulator in the Energy Industry;" Presented to the "Antitrust In Energy
Markets" Course, Sponsored by the University of Wisconsin Law School and Wisconsin Public
Utility Institute, August 27, 1996. 87. Parker, Director of Agriculture v Brown, 317 US 341, 350; 100 S Ct 937; 63 L Ed 233 (1943). 88. Otter Tail Power Co., supra. 89. California Retail Liquor Dealers Assoc.v Midcal Aluminum, Inc., 445 US 97, 105; 100 S Ct 937; 63 L Ed 2d 233 (1980). 90. City of Columbia v Omni Outdoor Advertising, Inc.; 499 US 365, 372; 111 S Ct 1344,
113 L Ed 2d 382 (1990). An example of the application of the first prong test can be found in Cantor v Detroit Edison, 428 U.S. 579, 96 S.Ct. 3110, 49 L Ed 1141 (1976), in which Detroit
Edison was charged with antitrust violations for its light bulb exchange program. Even though the
program was included in rates filed and approved by the Michigan Commission, the Court
determined that the program did not "implement any statewide policy relating to light bulbs." 91. Patrick v Burget; 486 U S 94, 100; 108 S Ct 1658; 100 L.Ed 2d 83 (1988). 93. U.S. v Rochester Gas & Electric; No. 97-CV-6294T, decided February 17, 1998. 94. Restructuring Today; "What should utilities learn from Rochester Gas and Electric?" April 14, 1998; p.1. 95. U.S. v Rochester Gas and Electric, supra. p. 12. "I find that the goal of the State's policy of offering lower utility rates is to reduce utility costs and retain or attract businesses based on those lower utility costs. Competition from 'cogenerators' in the sale of electricity is consistent with that goal. . .." 96. Electric Utility Week; "Rochester G&E, Justice Dept. Settle Antitrust Case Over NUG Deferral;" March
2, 1998, p.3. 97. Restructuring Today, supra, p.2. 99. It is our understanding that FERC decisions do not carry the same immunity as those of
state commissions. Thus, FERC decisions regarding interstate transmission would not be protected against antitrust claims. 101. "Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint
of trade or commerce among the several States, or with foreign nations, is declared to be illegal. .
." (15 USC 1). Also, see Meeks, Trotter, and Adelberg for additional discussion. 102. Meeks, "Antitrust Concerns," supra. p 14. 105. id. and Szymanski, Paul A.; "Competition, Antitrust, and the Specter of the Marketplace, A Primer for State Commissions;" Massachusetts Department of Public Utilities, 1994, p 5. 106. Section 7 of the Clayton Act (15 USC 18) also deals with joint ventures, and Section 3
of the Clayton Act (15 USC 14) deals with vertical restraints. 107. In his presentation to at the Institute of Public Utilities, Meeks cites National Collegiate
Athletic Ass'n v Board of Regents of Univ. of Oklahoma, 468 US 85 (1984) as an example of a
network being found to be essential to the market, and BMI v Columbia Broadcasting Sys. Inc., 441
US 1 (1979) as an example of a situation in which the agreement facilitated the functioning of the
market. 108. "Every person who shall monopolize, or attempt to monopolize, or combine or conspire
with any other person or persons, to monopolize any part of the trade or commerce among the
several States, or with foreign nations, shall be deemed guilty of a felony . . ." (15 USC 2). 109. Meeks, "Economic and Legal Foundations" supra. pg. 10. 111. Copeland, David S.; Symposium: Antitrust, Joint Ventures, and Electric Utility
Restructuring: Requiring Transmission Access by Electric Utilities: The Shifting Roles of Regulation
and Antitrust, 64 Antitrust LJ 291. 112. "No person engaged in commerce or in any activity affecting commerce shall acquire,
directly or indirectly, the whole or any part of the stock or other share capital and no person subject
to the jurisdiction of the Federal Trade Commission shall acquire the whole or an part of the assets
of another person engaged also in commerce. . .where . . .the effect of such acquisition may be
substantially to lessen competition, or tend to create a monopoly . . ."(15 USC 18). 114. US Department of Justice and Federal Trade Commission; "Horizontal Merger Guidelines,"
issued April 2, 1992, 57 FR 41,552 (1992). 115. Federal Energy Regulatory Commission; "Policy Statement Establishing Factors the Commission
Will Consider in Evaluating Whether a Proposed Merger Is Consistent with the Public
Interest," issued December 18, 1996, 77 FERC 61,263, (1996). 116. Foster Electric Report; "Justice's Joel Klein Suggests Limited Moratorium on Utility Mergers;" No 131; February 4, 1998; p. 6. 117. LCG News; "1996, A Year of Energy Utility Mergers; More to Come;" December 26,
1996. 118. "(a) It shall be unlawful for any person engaged in commerce . . . either directly or
indirectly, to discriminate in price between different purchasers of commodities of like grade and
quality where either or any of the purchases involved in such discrimination are in commerce . . .
one where the effect of such discrimination may be substantially to lessen competition or tend to
create a monopoly in any line of commerce, or to injure, destroy, or prevent competition with any
person who either grants or knowingly receives the benefit of such discrimination, or with
customers of either of them . . ."(15 USC 13(a)). 119. Carstensen, Peter; "Outline of Antitrust Law and the Deregulated Utility," Presented to the
"Antitrust In Energy Markets" Course; Sponsored by the University of Wisconsin Law School and
Wisconsin Public Utility Institute, August 27, 1996. 120. Meeks, "Antitrust Concerns," supra. p 18. 121. "Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful." 15 USC 45(a)(1). 122. Young, William F.; "The Antitrust Ground Rules;" Presented at the "Antitrust and Anticompetitive
Behaviors" Conference, sponsored by Infocast, Washington D.C.; December 4-5, 1997; p.19. 124. Gulf States Utilities Co. v Federal Power Commission; 411 US 747; 36 L Ed 635; 644; 93 S Ct 187 (1973). 125. Meeks, "Antitrust Concerns," supra. p. 12. 126. Indeck Energy Services (an independent power production company) has filed an antitrust suit under the Sherman Act against CMS Energy and its affiliate, Consumers Energy, charging that CMS and Consumers are
monopolizing and attempting to monopolize the Michigan electricity market by refusing to provide Indeck with
essential facilities, including interconnection to Consumers' transmission grid and natural gas delivery. Indeck
Energy Services, Inc v Consumers Energy Company; Case No. 97-10366 (E.D. MI) (filed October 10, 1997). 127. Baer, William J.; "FTC Perspectives on Competition Policy and Enforcement Initiatives on Electric
Power;" presented at the "Antitrust and Anticompetitive Behavior" Conference; sponsored by Infocast; Washington,
D.C., December 4-5, 1997, p. 3. 128. Melamed, Douglas A.; Principal Deputy Assistant Attorney General, Antitrust Division, U.S.
Department of Justice; "Testimony Before the Committee of the Judiciary, U.S. House of Representatives;" June 4,
1997; p. 6. 130. "Comments of the U.S. Department of Justice In the Matter of Promoting Wholesale
Competition Through Open Access Non-discriminatory Transmission Services by Public Utilities,
Recovery of Stranded Costs by Public Utilities and Transmitting Utilities; Proposed Rulemaking and
Supplemental Notice of Proposed Rulemaking;" Docket Nos. RM95-8-000 and RM94-7-001, filed
August 7, 1996. 135. The Securities and Exchange Commission also has authority to review proposed electric
utility mergers to assure compliance with applicable securities laws, however, in recent years has
not played an active role in these investigation. 136. For an extensive discussion of mergers, see Frankena, Mark W., and Bruce M. Owens; Electric Utility Mergers: Principles of Antitrust Analysis; Praeger; Westport, Conn.; 1994. 137. Electric Utility Week; "Judge Rejects HI Petition;" March 26, 1996. 139. Electrical World; "DoJ Hints at Antitrust Nuances;" citing comments by Jade Eaton,
September, 1996; Vol. 210, No. 9, p 5. Open access tariffs certainly do reduce - but do not
eliminate market power concerns. 141. Federal Energy Regulatory Commission; "Public Service of Colorado;" 58 FERC 61,322 at
62,038, (1992 ), cited by Kelliher, p 548. 143. Copeland speculates that, post EPAct, Federal courts will be less responsive to claims of
"refusal to wheel" suits under Section 2 of the Sherman Act, (such as Otter Tail), that in a Section
2 case involving a Federally regulated utility, there must be a specific intent to monopolize while
only a general intent is required for non-regulated utilities, citing City of Groton v Connecticut Light
and Power Co., 662 F 2d 921, 931-32, US Court of Appeals, Second Circuit (1981). 144. For example, see "Entergy Services Inc.," 59 FERC 61,369 at 62,418 (1992) provides an
example of conditioning approval of market-based rates, and "Utah Power and Light, Co.," 45 FERC
61,095 at 61,269 (1988), provides an example of conditioning approval of a merger. Both cited by
Kelliher, Joseph T., Pushing the Envelope: Development of Federal Electric Transmission Access
Policy; 42 Am UL Rev 543, 564 & 559. 145. Federal Energy Regulatory Commission; Orders 888 and 888A; supra. . 152. "Joint Application for Authority to Sell Electric Energy at Market-Based Rates Using a
Power Exchange," (ER96-1663-000) and "Joint Application for the Authorization to Convey
Operational Control of Designated Jurisdictional Facilities to an Independent System Operator;"
(EC96-19-000), filed April 29, 1996. 153. Federal Energy Regulatory Commission; "Order Providing Guidance and Convening a
Technical Conference," Docket No. ER96-1663-000, 77 FERC 61,265, December 18, 1996. 157. Federal Energy Regulatory Commission; "Policy Statement Establishing Factors The
Commission Will Consider in Evaluating Whether A Proposed Merger Is Consistent With The Public
Interest;" Docket No. RM96-6-000, 77 FERC 61,263. 159. Federal Energy Regulatory Commission; "Commonwealth Edison Co.," 36 FERC 927
(1966). 160. Federal Energy Regulatory Commission; "Policy Statement - Mergers," supra. p 6. 161. Ohio Power Co. v FERC; 954 F 2d 779 (1992). 162. Federal Energy Regulatory Commission; "Baltimore Gas and Electric Company and
Potomac Electric Power Company, Opinion and Order Authorizing Proposed Merger;" Docket Nos.
EC96-10-000 and ER96-784-000, issued April 16, 1997. 164. Federal Energy Regulatory Commission; "Order 888A," supra. p 668. Note, many states
dispute this claim. 166. Federal Energy Regulatory Commission; "
Policy Statement -- Mergers," supra. p. 62. 167. California Public Utilities Commission; "Order Instituting Rulemaking on the Commission's Proposed Policies Governing Restructuring California's Electric Services Industry and Reforming Regulation;" (Preferred
Policy Decision); D.95-12-063, December 20, 1995 (as modified by D.96-01-007), p. 90-91. 168. Electric Utility Week; "California PUC Informs Legislature Mitigating Market Power Is Key
Task;" March 31, 1997, p. 11. 169. State of California, "AB 1890 of 1996: Public Utilities: Restructuring;" enrolled August
31, 1997, Sec. 330(l)(3). 170. id. Sec. 330(k)(1) and (l)(1). 171. California Public Utilities Commission, "Status, supra., p. 1. 172. California Public Utilities Commission, "Preferred Policy Decision," supra. p. 101. 173. California Public Utilities Commission, "Status Report," supra. p. 2-3. 175. Wall Street Journal; "Edison to Sell 10 Power Plants to Firms Betting on Deregulation in California;" November 25, 1997. 176. California Public Utilities Commission; "Order Instituting Rulemaking on the Commission's
Proposed Policies Governing Restructuring California's Electric Services Industry and Reforming
Regulation;" Decision 96-12-088, December. 20, 1996, p. 16. 178. Maine Public Utilities Commission; "Electric Utility Industry Restructuring, Docket No. 95-462, Report and Recommended Plan;" December 31, 1996. 187. State of Maine; "An Act to Restructure the State's Electric Industry;" H.P. 1274 -L.D. 1804, May 29,
1997, Chapter 32, 3204(1)-(7). 188. id., Chapter 32, 3205(4). 189. Energy Central News; "DCR Places Central Maine Power on Rating Watch-Up;" February
23, 1998 (news@energycentral.com). 190. Commonwealth of Massachusetts, Department of Public Utilities; "Electric Industry
Restructuring Plan: Model Rules and Legislative Proposal;" D.P.U. 96-100, December 30, 1996, p. 67.
191. id.
192. id. p. 68.
193. Although the Commission acknowledged that it lacked authority to order divestiture, the
stated preference of the MDPU appears to be having some effect. Massachusetts Electric agreed to
full divestiture of its generation assets in a settlement agreement approved in late February 1997. 194. Commonwealth of Massachusetts, D.P.U. 96-100, supra. p. 73. 202. Manchester Union Leader; "Electric Competition Pays Off;" February 4, 1998. 203. State of Montana; "Electric Utility Industry Restructuring and Customer Choice Act;" Chapter 505,
Senate Bill 390, 1997 Mt ALS 505. 208. id., Section 5(2)(b)(iii). 209. Energy Central News; "The Montana Power Company . . .," December 10, 1997. 210. State of Nevada; "An Act Relating to Electric Service; Revising Provisions for the Regulation of
Electric Service to Allow Customers Direct Access to Alternative Sellers of Electric Services;" A.B. 366, July 16, 1997. 218. Public Utilities Commission of New Hampshire; "Restructuring New Hampshire's Electric
Utility Industry: Final Plan;" DR96-150, February 28, 1997, pp. 12-13. 222. Public Utilities Commission of New Hampshire; "Restructuring New Hampshire's Electric Utility Industry: Preliminary Plan;" DR96-150, September 10, 1996, p. 19. 223. Public Utilities Commission of New Hampshire; "Final Plan;" supra., pp. 20-21; (The New Hampshire Commission cited Appendix C to FERC "Order 888"). 225. Public Utilities Commission of New Hampshire; "Final Plan;" supra., p. 13. 226. State of New Hampshire; "An Act Restructuring the Electric Utility Industry in New Hampshire and
Establishing a Legislative Oversight Committee;" H.B. 1392, April 16, 1996. 227. id., Chapter 374-F:3(VII). 228. id., Chapter 374-F:3(III). 229. Manchester Union Leader, supra. 230. State of New York Public Service Commission; "In the Matter of Competitive
Opportunities Regarding Electric Service, Opinion and Order;" Opinion No. 96-12, May 20, 1996. 231.
id., p. 59. 233. Utility Spotlight; "Niagara Mohawk, Atlanta Gas Light File Their Power Deregulation Plans;" December 8, 1997, p. 5. 234. State of New York Public Service Commission; "Opinion No. 96-12," supra., p. 63. 238. State of Oklahoma; "Oklahoma Enrolled Senate Bill No. 500;" Signed into law April 25, 1997, Section 4(14)(b)(1). 240. The Pennsylvania Public Utilities Commission; "Report and Recommendation to the
Governor and General Assembly on Electric Competition;" From the Investigation into Retail
Competition at Docket No. I-940032, July, 1996, p. 12. 242. State of Pennsylvania; "Electricity Generation Customer Choice and Competition Act;" 66 Ps.C.S.
2811(A). 243. id., 2811(B). 245. id., Section 2804(16)(ii)(A). 246. State of Rhode Island, 1996 Legislative Session, H.B. 8124, 1996 R.I. ALS 316. 252. Vermont Department of Public Service; "Restructuring the Electric Utility Industry: the
Consumer and the Environment;" Technical Report No. 35, May, 1996, p. 5. 253. State of Vermont Public Service Board, "Investigation into the Restructuring of the
Electric Utility Industry in Vermont: Introduction, Overview and Order;" Docket No. 5854,
December 30, 1996, p. 5. 256. Vermont Department of Public Service; Technical Report, supra., p. 5. 257. "Notice of Proposed Rulemaking: Recovery of Stranded Costs by Public Utilities and
Transmitting Utilities;" Docket No. RM94-7-000, issued July 11, 1994. In this NOPR, FERC put all
wholesale sellers and buyers on notice that any provisions for recovery of stranded costs would
need to be included in future contracts. 258. Federal Energy Regulatory Commission, "Order 888A," supra. p 747. 259. Teichler, Stephen L.; "Generation, Deregulation, and Market Power: Will Antitrust Laws
Fill the Void?" Fortnightly, October 15, 1996, p 14. 260. Enron Energy Services (EES) has withdrawn from the residential power market in California citing in
part the high Competitive Transition Charge (CTC) surcharge, which amounts to approximately 33% of the
residential electricity bill. EES has also determined it will not pursue residential sales in Massachusetts and Rhode
Island for similar reasons. Electricity Daily; "Enron Jettisons Calif. Residential Market;" Vol. 10, No. 78; April 24,
1998; p 1. 263. Cajun Electric Power Cooperative, Inc. v FERC, 28 F 3d 173 (1994). 265. Segal, Scott H.; "Antitrust and Anticompetitive Conduct: The Potential for Cross-Subsidization of Non-Energy Service Providers During the Transition to Retail Competition;" presented at the "Antitrust and
Anticompetitive Behavior" Conference sponsored by Infocast, Washington D.C., December 4-5, 1997, p. 8. 266. id. p. 2.
267. Watkiss, Jeffrey D.; "Competitive Concerns of Power Marketers, Independent Power Producers and
Other New Entrants;" presented at "Antitrust and Anticompetitive Behavior" Conference, presented by Infocast;
Washingon, D.C., December 4 and 5, 1997, p. 6. 271. "B&J School Bus Serv., Inc.," 58 Fed. Reg. 26,787 (May 5, 1993) (consent order) as cited by Ray V. Hartwell in "Antitrust Analysis of Mergers and Joint Ventures in the Electric Power Industry;" presented at the
"Antitrust and Anticompetitive Behavior" Conference, sponsored by Infocast, December 4-5, 1997, Washington, D.C, p. 50. 272. Hartwell, Ray V.; "Antitrust Analysis of Mergers and Joint Ventures in the Electric Industry;" presented at the "Antitrust and Anticompetitive Behavior" Conference; sponsored by Infocast; Washington, D.C.; December
4-5, 1997, p. 51. 273. U. S. v. Penn-Olin Chemical Co. et al., 378 US 158; 84 S Ct 1710; 12 L Ed 2d 775; 1964; 168. 276. U.S. Department of Justice and Federal Trade Commission; "Statement of Antitrust Enforcement Policy in Health Care;" (1996) 8.B.2. as cited by Hartwell, p. 51. 278. Earley, Anthony F., Jr.; "Planning Around Antitrust and Anticompetitive Behavior Issues in Business
Combinations;" comments presented at the "Antitrust and Anticompetitive Behavior" Conference sponsored by
Infocast, December 4-5, 1997, Washington, D.C. 279. Atwood, James R.; Symposium: Antitrust, Joint Ventures, and Electric Utility
Restructuring: Antitrust, Joint Ventures, and Electric Utility Restructuring: RTGs and Poolcos; 64
Antitrust LJ 323. 282. Bingaman, Anne K.; "Interjecting Competition into Regulated Industries and Utilities;"
Washington, D.C., April 20, 1995, cited in Atwood. 283. Rosen, Richard A., and Heidi L. Kroll; "Leveraging -- The Key to Exercise of Market Power in a Poolco;" Tellus Institute, Boston, Ma.; June 25, 1996, p. 1. 286. Rosen and Kroll, supra. p. 2. 287. Boomsma, David J.; "Horizontal Market Power and Mergers in a Changing Electric Power
Industry;" Proceedings of the Tenth NARUC Biennial Regulatory Information Conference; Columbus,
OH; September 11-13, 1996. 288. Serota, James I.; Symposium: Antitrust, Joint Ventures, and Electric Utility Restructuring:
Increasing Competition in the Electric Utility Industry and Decreasing Consumer Welfare: An
Antitrust Paradox; 64 Antitrust LJ 303 (1996). 289. "No person, partnership, association or corporation, public or private, operating a public
utility shall have the right to the use of the highways, streets, alleys or other public places of any
county, township, city or village for wires, poles, pipes, tracks, conduits or other utility facilities,
without the consent of the duly constituted authority of the county, township, city or
village...without first obtaining a franchise from the township, city or village." Michigan
Constitution, Article 7, Section 19 290. "No public utility...shall render any service for the purpose of transacting or carrying on a
local business either directly, or indirectly, by serving any other utility..so engaged in such local
business...until such public utility shall first obtain from the commission a certificate that public
convenience and necessity requires or will require such construction, operation, service, or
extension." MCL 460.502 et seq. 293. The power exchange was not supported by some groups, and others wanted to
study the issue in more detail before coming to a conclusion. Energy Michigan did not support a
power exchange. MIPPA identified a need for a separate renewable energy power exchange or
power pool. MMEA stated it needs more information to evaluate the power exchange concept.
WIPSCo did not agree that a power exchange was "essential", and said it might not be the best
alternative. 294. The issues covered in the proposed codes of conduct were broader than market
power alone. Some addressed traditional regulatory issues, such as appropriate separations
between regulated and unregulated activities. Several others addressed customer focus issues,
such as billing practices and communications between utilities and customers. This paper examines
the conduct issues directly related to market power concerns involving power generation and sales.
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