Understanding Antitrust Issues and Managing Antitrust Risks

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Understanding Antitrust Issues and Managing
Antitrust Risks
Presentation to NEPOOL Markets CommitteeWestboro,
MA, December 18, 2002 John C. Peirce
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Antitrust Issues

• Competitors agreeing not to compete
• Buy-Sell Arrangements With Competitors
• Market power and monopolization
• Subcontracting and Joint ventures
• Merger regulation

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Antitrust Risks

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

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Sherman Act 1Basics
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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.

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Restraint of trade

• Courts interpret to prohibit unreasonable
  restraints
• How do we know what is unreasonable?

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Antitrust Legalese (1)

• Horizontal between competitors
• Vertical between a supplier and a customer

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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.

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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

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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

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Hypothetical Antitrust ScenariosPricing
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Price Agreements (1)

• Integrated gas-electric energy company agrees on
  price and terms of bilateral sale to its
  competitor

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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.

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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.

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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.

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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.

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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.

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Hypothetical Antitrust ScenariosImmunity
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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

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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

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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

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Hypothetical Antitrust ScenariosBidding
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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

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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

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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.

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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.

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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.

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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?

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Hypothetical Antitrust ScenariosAssociations
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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

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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

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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

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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?

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Joint Buying

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

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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

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Hypothetical Antitrust ScenariosExclusivity
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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

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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

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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

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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

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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

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Hypothetical Antitrust ScenariosMarket Power
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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?

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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

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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

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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

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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

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Sherman Act 2Basics
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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

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Hypothetical Antitrust ScenariosMonopoly
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Monopolization?

• Company A owns half of the peaking capacity in
  the control area and contracts to control another
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• A continues to bid the peakers at levels the ISO
  believes are reasonable

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Tying?

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

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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

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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

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