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Understanding Antitrust Issues and Managing Antitrust Risks

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Title: Understanding Antitrust Issues and Managing Antitrust Risks


1
Understanding Antitrust Issues and Managing
Antitrust Risks
Presentation to NEPOOL Markets CommitteeWestboro,
MA, December 18, 2002 John C. Peirce
2
Antitrust Issues
  • Competitors agreeing not to compete
  • Buy-Sell Arrangements With Competitors
  • Market power and monopolization
  • Subcontracting and Joint ventures
  • Merger regulation

3
Antitrust Risks
  • Criminal penalties -- fines and prison
  • Civil treble damages
  • Disruptive lawsuits can last years
  • Strategic change may be delayed or stopped
  • Political scapegoating

4
Sherman Act 1Basics
5
(No Transcript)
6
Sherman Act Section 1
  • 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.

7
Restraint of trade
  • Courts interpret to prohibit unreasonable
    restraints
  • How do we know what is unreasonable?

8
Antitrust Legalese (1)
  • Horizontal between competitors
  • Vertical between a supplier and a customer

9
Antitrust Legalese (2)
  • Per se violations
  • Price fixing
  • Horizontal allocation of customers or territories
  • Group boycott
  • Rule of Reason
  • Vertical exclusivity
  • Vertical allocation of customers or territories
  • Associations
  • Standards
  • etc.

10
Contract, combination . . . or conspiracy
  • No requirement of written agreement
  • Conspiracy sufficient but not necessary
  • Conscious parallelism (everybodys doing it)
    alone is not illegal
  • Plus factors

11
Antitrust Risk Management
  • Always comply with the law
  • Avoid ambiguous contacts with competitors
  • Understand your competitive position
  • Use antitrust analysis in strategic planning
  • When in doubt, contact Legal

12
Hypothetical Antitrust ScenariosPricing
13
Price Agreements (1)
  • Integrated gas-electric energy company agrees on
    price and terms of bilateral sale to its
    competitor

14
Price Agreements (2)
  • Monstrous Electric Gas signs bilateral
    wholesale contract with Enormous Wholesale
    Generator.
  • Monstrous insists on contract term that Enormous
    will not sell bilaterally to any other customer
    at a lower price.

15
Price Agreements (3)
  • Monstrous and Enormous agree neither of them will
    sell power or energy to anyone for less than the
    price specified in their bilateral contract.

16
Recorded Call Between Crandall (Pres. of
American) and Putnam (Pres. of Braniff)
  • Crandall I think its dumb as hell for
    Christs sake, all right, to sit here and pound
    the ____ out of each other and neither one of us
    making a dime.
  • Putnam Well . . . .
  • Crandall I mean, you know, goddamn, what the
    __is the point of it?
  • Putnam Do you have a suggestion for me?
  • Crandall Yes. I have a suggestion for you.
    Raise your goddamn fares twenty percent. Ill
    raise mine the next morning.
  • Putnam Robert, we . . . .
  • CrandallYoull make more money and I will too.
  • Putnam We cant talk about pricing.
  • CrandallOh bull____, Howard. We can talk about
    any goddamn thing we want to talk about.

17
Price Suggestions
  • Cashpoor Power Co.s credit manager complains at
    trade association meeting that other electric
    companies are selling to customers that Cashpoor
    has cut off for non-payment.

18
Dinner Party at Country Club
  • Present Jack Foley of Foley Realty, Inc. and
    nine
  • other leading realtors.
  • In his after-dinner speech, Foley announced his
    firm was raising its rates from 6 to 7 percent.
  • In the ensuing discussion no one else said how
    much they planned to charge.
  • Most realtors at the dinner later raised rates to
    7.
  • They were convicted of felony price-fixing.

19
Hypothetical Antitrust ScenariosImmunity
20
Price Caps
  • Group of competing generators coordinate their
    FERC filing strategy to seek higher price caps on
    constrained resources
  • To provide real-world evidence in support of
    their FERC filings, the generators agree to price
    at the existing lower caps as much as possible

21
Voting Blocs
  • Group of load serving entities that compete to
    buy ICAP agree to vote for more permissive
    standards (so more ICAP is available)
  • Same group also agrees to vote as a bloc on more
    favorable NERC reliability standards

22
Pole Attachments
  • Electric transmission owner T and phone utility P
    agree to file state tariffs that include minimum
    prices for outdoor lighting attached to their
    poles
  • The tariffs (which contain many other provisions)
    are approved without comment on the pole
    attachment pricing

23
Hypothetical Antitrust ScenariosBidding
24
Agreement to Reduce Bids
  • ISO market experiences frequent price spikes
  • A group of municipal utilities complain publicly
    that if others do not stop gouging, they will
    build generation
  • Immediately, the price gyrations stop

25
Agreement to Standardize Bids
  • A and B each own large generation units with
    similar heat rates
  • When As bid is lower, the ISO often runs As
    unit, but not Bs, and vice-versa
  • A and B agree to coordinate their bids so As
    unit will run on some days, and Bs on others

26
Price Suggestions (1)
  • ISO sponsors seminar to train Participants on
    bidding mechanics in new SMD environment.
    Seminar description reads as follows
  • Topics will include the trading tools being
    introduced in the SMD markets, what to consider
    when using these tools, potential benefits and
    risks for each, and using the tools in concert to
    optimize results.

27
Price suggestions (2)
  • Participant at SMD training seminar comments that
    if the larger Participants would all refrain from
    using a particular bid strategy, the market would
    avoid the kind of price spikes that alarm FERC
    and provoke state regulatory sanctions.

28
Communications
  • Due to an unscheduled outage at the Baseload Coal
    Plant, ISO dispatches Opportunity Powers
    combined cycle plant.
  • ISO schedulers mention to Opportunitys operators
    that Baseload is likely to be out for a week.
  • Opportunity immediately revises its bids for the
    week to maximize profits from Baseloads outage.

29
Market Monitor
  • Participant contacts ISO market monitor and asks
    Will I be subject to mitigation if I bid in the
    following way?
  • What are antitrust implications of the monitors
    answer?

30
Hypothetical Antitrust ScenariosAssociations
31
Preventing capacity expansion
  • ISO has significantly lower energy prices than
    neighboring areas
  • Transmission limitations constrain exports and
    raise congestion costs
  • Consortium of net buyer Participants (munis,
    REA coops, shareholder-owned local distribution
    companies, consumer groups and state regulators)
    block transmission expansion

32
Caucuses and Voting Blocs (1)
  • Committee members from each sector (transmission,
    generation, load-serving, etc.) meet ahead of
    scheduled Committee meeting to discuss how each
    bloc should vote on agenda items
  • Members of Generation Caucus also discuss bidding
    strategies

33
Caucuses and Voting Blocs (2)
  • At Markets Committee meeting on demand side
    bidding, Participants discuss different bidding
    strategies that could reduce power costs
  • Generation-owning Participant complains that the
    load-serving Participants as a group are planning
    to coordinate their bids to manipulate the market

34
Data Collection Information Exchange
  • ISO staff collect participants forecasts of
    capacity, demand and retail rates to prepare a
    region-wide load forecast
  • If staff believes the forecast supplied by one
    participant is out of line with those submitted
    by others, in what ways can staff discuss the
    apparent discrepancy with any participants?

35
Joint Buying
  • Participants form joint buying group to procure
    software at lower prices

36
Credit
  • Credit managers of competing sellers share
    information on their customers payment history
  • They devise a standardized rating system from 1
    (best) to 5 (worst)
  • They recommend no one should extend credit to any
    customer rated 4 or 5

37
Hypothetical Antitrust ScenariosExclusivity
38
Electric-Gas Agreement
  • Genco and Gasco make a confidential agreement to
    supply low-cost gas to Gencos new generation
    project
  • Gasco agrees not to offer the same arrangement to
    other generators
  • Because of the secret agreement, Gencos new
    project is feasible

39
Customer Restriction
  • Enterprise Energy and and Profligate Power both
    sell and buy gas and electricity in a multi-state
    region
  • Enterprise enters a long-term bilateral contract
    to sell power to Profligate on condition that
    Profligate not supply gas to any power plants in
    the region

40
Exclusive Contracts
  • Utility defeats cogeneration projects by
    systematically offering cogen deferral rates
  • There are no new cogen projects built in
    Utilitys service territory
  • Utility requires customers receiving cogen
    deferral rates to agree not to develop
    cogeneration

41
Long-Term Contract
  • Power company negotiates 20-year contract with
    most large industrial customers in its service
    area
  • In exchange, power company agrees to freeze or
    lower its rates

42
Exclusive Dealing
  • Power Marketer offers favorable rate to large
    retail customers with multiple locations (e.g.
    fast food, Wal-Mart, industry with multiple
    plants), some of which are presently served by
    franchised utilities, on condition that customers
    agree to switch all of their locations to
    Marketer as soon as retail competition is
    implemented

43
Hypothetical Antitrust ScenariosMarket Power
44
What Is Market Power?
  • Size?
  • Market share?
  • Ability to raise price profitably by withholding
    output?
  • What your biggest competitor has when you lose a
    sale to them?

45
Withholding Output/Scarcity
  • A, which sells into an ISO market, owns baseload
    capacity and some peaking units
  • During a heat wave A bids all its peakers at
    1,000. One of them runs for 10 minutes and sets
    the market price
  • As scheduler tells her counterpart at another
    generation owning company that prices are headed
    up

46
Arbitrage
  • A owns most of the reservoir-limited hydro in RTO
    area
  • A operates as little as possible in off-peak
    periods to maximize revenues
  • As a result AGC and spinning reserves are scarce
    in off-peak periods and the RTO must run some of
    As thermal resources for AGC and spin

47
RMR Contracts
  • ISO creates Reliability Must-Run contracts to
    prevent owners of scarce resources from abusing
    market power
  • Owners of RMR resources withhold some lower-cost
    non-RMR capacity in order to get their RMR units
    called

48
Access
  • Generator G needs a 3-week transmission outage in
    October to interconnect new units at a new site
  • Participants pressure ISO not to schedule the
    outage until March, due to congestion and
    reliability problems

49
Sherman Act 2Basics
50
Sherman Act Section 2
  • Prohibits
  • Anticompetitive conduct to obtain monopoly
  • Anticompetitive conduct to keep monopoly
  • Permits
  • Obtaining monopoly by skill or accident
  • Keeping monopoly by any fair means (e.g., being
    efficient)
  • Charging monopoly prices

51
Hypothetical Antitrust ScenariosMonopoly
52
Monopolization?
  • Company A owns half of the peaking capacity in
    the control area and contracts to control another
    30
  • A continues to bid the peakers at levels the ISO
    believes are reasonable

53
Tying?
  • City requires developers to connect to city
    electric system in order to get city water and
    sewer

54
Essential Facility? (1)
  • The State of Pandemonium is suffering a severe
    energy shortage
  • Able Energy owns 5 of the 6 best sites for new
    generation in Pandemonium
  • Able announces plans to build generation on 2 of
    its 5 sites
  • Able refuses all offers to lease or buy its other
    sites

55
Essential Facility? (2)
  • Load aggregator A in a state with retail
    competition asks IOU for hourly load data on its
    large industrial customers
  • The IOU refuses
  • A complains that without the load data, which
    customers dont have, it cant compete effectively

56
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