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BOROUGH OF ELLWOOD CITY v. PENNSYLVANIA POWER CO.

January 4, 1979

BOROUGH OF ELLWOOD CITY, PENNSYLVANIA, Borough of Grove City, Pennsylvania, Municipal Corporations, Plaintiffs,
v.
PENNSYLVANIA POWER COMPANY, a Pennsylvania Corporation, Defendant



The opinion of the court was delivered by: MCCUNE

Plaintiffs, the Boroughs of Ellwood City and Grove City, have brought this civil antitrust action against defendant, the Pennsylvania Power Company (Penn Power), alleging violations of the Sherman Act, 15 U.S.C. §§ 1 and 2, and the Clayton Act, 15 U.S.C. § 12(a), by Penn Power, and seeking injunctive and declaratory relief in addition to treble damages, as provided in the Sherman and Clayton Acts. Plaintiffs both purchase power from Penn Power and sell power to retail customers in competition with Penn Power. The practices of which plaintiffs principally complain involve the setting of wholesale charges to plaintiffs at a level which impedes plaintiffs' ability to compete with defendant in the retail market. Plaintiffs also contend, as miscellaneous claims, (a) that defendant has refused to transport, or "wheel" power to plaintiffs from other sources, effectively precluding plaintiffs from obtaining suppliers of power other than Penn Power; (b) that Penn Power has refused to provide services which would allow plaintiffs to obtain large commercial customers; and (c) that Penn Power has engaged in ratemaking and service policies which are intended to lessen plaintiffs' ability to compete with Penn Power in the retail market. In response to plaintiffs' wholesale rate claim, defendant has moved to dismiss for lack of jurisdiction due to the purported exclusive jurisdiction of the Federal Energy Regulatory Commission (FERC) *fn1" over the claim asserted. In the event that this motion is denied, defendant has moved, in the alternative, for a stay of this proceeding pending the determination by the FERC of issues raised in this suit concurrently raised in proceedings before the FERC. Penn Power moves, pursuant to Rule (12)(b)(6) of the Federal Rules of Civil Procedure, for dismissal of all of plaintiffs' miscellaneous claims for failure to state a cause of action.

These motions arise 10 months subsequent to the filing of the complaint. Despite the lengthy period since discovery was invoked, it is contemplated that the parties have only begun the process of discovery. It is clear, however, at this time that this court has jurisdiction over plaintiffs' claims. Plaintiffs' rate claims are presently being considered by the FERC, and a stay of these claims pending the FERC determination is justified to avoid duplication of effort. All of plaintiffs' miscellaneous claims are not at this time ripe for summary judgment. The miscellaneous claims which are not disposed of here, are not subject to stay and discovery may continue insofar as it is relevant to these claims and not matters before the FERC.

 Factual Background and Plaintiffs' Claims

 The electric power industry is comprised of companies engaged in three distinct functions; the generation of power, the transmission of very high voltages (bulk power) to distribution points, and distribution of power to consumers at stepped down voltages. The generation of electric power, and, to a degree, the transmission of electric power, are subject to substantial economies of scale. Those companies engaged in the generation function thus tend to be large and frequently are vertically integrated. To take even greater advantage of economies of scale, large companies frequently join with other large companies to form even larger "power pools" which protect against cyclic demand and allow each company to reduce its share of excess capacity. Penn Power is such a large company. Serving a large portion of Western Pennsylvania, Penn Power is engaged in the generation, transmission and distribution of power. Penn Power is a wholly owned subsidiary of Ohio Edison Company. Along with Ohio Edison, the Duquesne Light Company, Toledo Edison Company and Cleveland Electric Illuminating Company, Penn Power is a member of a large power pool, the Central Area Power Coordination Group (CAPCO). Through CAPCO, these firms are able to take advantage of the economies of scale available in the generation and transmission of power.

 The distribution of power, unlike its generation, is not subject to substantial economies of scale. Distribution constitutes a natural monopoly, since the duplication of distribution facilities is prohibitively expensive in view of the potential waste involved. As a result, numerous small distribution companies serving a limited area purchase bulk power profitably from large generation companies for resale to industrial, commercial, and residential customers. Often, these distribution companies are municipal corporations serving customers within their municipal boundaries. Plaintiffs are such companies. Both are municipalities; both are involved only in the distribution of power; and both purchase power for resale from Penn Power.

 Not only does Penn Power sell power to plaintiffs at wholesale rates, but it is also engaged in the retail distribution of power to customers in the area surrounding plaintiffs' service area. Plaintiffs allege, insofar as competition is possible in the distribution function, Penn Power and plaintiffs compete. For practical purposes, competition between Penn Power and plaintiffs can be seen most strongly in the service of industrial and commercial customers having the option to locate in either the service area of Penn Power or that of plaintiffs. These customers do have a choice of suppliers when making their initial decision to locate their operations. If the retail rates of plaintiffs and Penn Power differ, the location choice of the potential customer can be affected by the differential. Plaintiffs and Penn Power also compete, at least theoretically and on a long term basis, for service areas. If plaintiffs were to become unable to serve their customers profitably, Penn Power would logically be in the best position to assume plaintiffs' present service. The eventual assumption of plaintiffs' service by Penn Power is subject to many indeterminable variables, but it is possible. Insofar as it is possible, the possibility of the assumption of plaintiffs' service area by Penn Power also constitutes a form of competition.

 Plaintiffs must deal with Penn Power for their supply of bulk power at wholesale rates. Because plaintiffs' systems are surrounded by Penn Power's service area, any power which could be acquired by plaintiffs would, of necessity, be generated by Penn Power or transmitted to plaintiffs through Penn Power's transmission facilities. It is the position of the plaintiffs that Penn Power thus has the ability to dictate the profitability of plaintiff's operations, theoretically to the point of destroying, completely, plaintiffs' ability to operate profitably, subject only to state and federal regulation and market constraints. Penn Power possesses this power while concurrently competing with plaintiffs in the retail market.

 Plaintiffs contend that Penn Power is using its dominant position to their detriment. Plaintiffs' complaint (as stated in the introduction to this opinion) indicates three general types of practices which they argue are violative of the antitrust laws. The most significant complaints relate to the wholesale rates which Penn Power has filed with the FERC which limit plaintiffs' profitability in light of the retail tariffs in effect. These rates are presently being considered by the FERC and plaintiffs have intervened in proceedings before the FERC regarding these rates. Plaintiffs' argument, both here and before the FERC, is that Penn Power's wholesale rates create an impermissible price squeeze in violation of the antitrust laws. See U. S. v. Aluminum Co. of America, 148 F.2d 416 (2nd Cir. 1945).

 Included in the miscellaneous claims, plaintiffs complain that Penn Power has refused to deal with them when special technical services (69 kv and two point delivery) were requested to enable plaintiffs to serve industrial customers. Plaintiffs also seek access to the CAPCO power pool, which they contend Penn Power, along with other members of CAPCO, have conspired to block. Plaintiffs complain that Penn Power has adopted a policy of refusing to wheel power purchased from other sources to plaintiffs through their transmission facilities. These practices, plaintiffs argue, constitute refusals to deal in violation of the antitrust laws.

 Plaintiffs finally contend (as part of their miscellaneous claims) that Penn Power has timed its submission of rates with the intention of damaging plaintiffs' ability to compete. The rate changes complained of allegedly made equipment purchased by plaintiffs unprofitable to operate. Plaintiffs also contend that Penn Power has failed to give them quantity discounts given to other similar wholesale customers.

 Penn Power has moved to dismiss the rate related price squeeze counts in plaintiffs' complaint, arguing that ratemaking on both the wholesale and retail levels is so regulated by the state and federal governments as to create immunity from antitrust review of rate decisions. Penn Power relies on the rule of Parker v. Brown, 317 U.S. 341, 63 S. Ct. 307, 87 L. Ed. 315 (1943) in contending that any antitrust violations based on retail rates as set by the Pennsylvania Public Utility Commission (PUC) are immune from antitrust review. Penn Power also argues that wholesale rates set by the FERC cannot create liability due to the rule of Gordon v. New York Stock Exchange, 422 U.S. 659, 95 S. Ct. 2598, 45 L. Ed. 2d 463 (1975), the federal correlate of the Parker rule. Finally, Penn Power inferentially argues that the combined effect of federal and state regulation creates antitrust immunity. Each of these arguments must be separately considered.

 Insofar as state regulation is urged as a basis of antitrust immunity, this action is controlled by the holding of Cantor v. Detroit Edison, 428 U.S. 579, 96 S. Ct. 3110, 49 L. Ed. 2d 1141 (1976). Cantor was a private antitrust suit brought as a result of actions of Detroit Edison, a public utility, pursuant to a binding tariff approved by the state regulatory commission. Detroit Edison provided customers with lightbulbs in an amount determined by the power usage of the customer. No charge for the bulbs, beyond that of the rate charged for power usage, was made. The program was designed to stimulate the use of power by Detroit Edison customers. The plaintiff, a retail distributor of lightbulbs, brought an antitrust action against Detroit Edison, alleging the lightbulb program was a tying arrangement in violation of the antitrust laws.

 The bulb distribution plan was submitted as part of a comprehensive tariff filed with and approved by the state regulatory commission. The tariff could not be varied by the utility while it remained in effect. The utility could, however, file a new tariff at any time, dropping the lightbulb program. Such a tariff would be effective upon approval of the commission. The issue presented was whether such a tariff would create antitrust immunity as an act under compulsion of the sovereign. The Court held it did not.

 Justice Stevens, joined by a plurality of the Court, wrote the opinion of the Court, an opinion in which Chief Justice Burger concurred in two significant parts. Justice Brennan concurred in the result, but not the reasoning of the plurality.

 Justice Stevens discusses the holding of Parker in the first section of the plurality opinion. Based on the history and careful language of Parker, Justice Stevens concludes that Parker applies only to acts of the state or its agents. Since Cantor does not involve actions of the state alone, Parker does not control. This holding was not joined by the majority of the Court, however. As a result, the scope of Parker is unclear. See Burger Concurrence, 428 U.S. 604, 96 S. Ct. 3110.

 Part two of the plurality opinion is joined by Chief Justice Burger. Because of the concurrence of the Chief Justice, this section (and section four) contains the critical majority holding of the Court.

 The question considered in part two of the decision is whether "private conduct required by state law is exempt from the Sherman Act." Parker, itself, is not considered. The Court turns rather to other precedent in attempting to define a rule controlling the question posed.

 The Court initially accepted the contention that it would be fundamentally unfair to impose liability upon individuals acting entirely under compulsion by the state. Most state compulsion is, however, a mixture of state and private decision-making. A fairness standard, therefore, beyond being unhelpful in most cases, rarely would apply, and was thus rejected.

 Turning to precedent concerning implied exemption from the antitrust laws by federal regulatory legislation, the Court held that exemption would be found only if "exemption was necessary in order to make the regulatory act work "and even then to the minimum extent necessary.' " Id., at 597, 96 S. Ct. at 3121, quoting Otter Tail Power Company v. U. S., 410 U.S. 366, 389, 93 S. Ct. 1022, 35 L. Ed. 2d 359 (1973).

 Under the holding of Cantor, it was clear that a lightbulb distribution program was not necessary to the regulation of electric power sales.

 We conclude, based on the Cantor holding, that state regulation of retail rates does not immunize the wholesale rates when, as here, a price squeeze is alleged and wholesale rates are beyond state jurisdiction.

 The Pennsylvania Public Utility Code, 66 P.S. § 1101 Et seq., requires all tariffs to be approved by the PUC prior to becoming effective. 66 P.S. § 1142. The rates approved must be just and reasonable. 66 P.S. § 1141. There is nothing in this regulatory scheme which would be inconsistent with the prohibition of a price squeeze such as that asserted by plaintiffs. In fact, the wholesale rates controlled by the FERC are not controlled by the PUC. 66 P.S. § 1142. The full mechanism of price squeeze, therefore, the control of both retail and wholesale rates, is not within PUC control. Applying antitrust review to the differential between these rates is thus not inconsistent with the state regulatory scheme; the subject of the claims falls outside the regulatory regime. State regulation does not provide grounds for an implied exemption to the antitrust laws in this instance. Accord, City of Mishawaka v. Indiana & Michigan Electric Company, 560 F.2d 1314 (7th Cir. 1977), and City of Shakopee v. Northern States Power Co., Civ. No. 4-75-591 (D.Minn.1976).

 Penn Power relies heavily upon a recent opinion of the Court of Appeals for the Third Circuit, Mobilfone of Northeastern Pennsylvania v. Commonwealth Telephone Co., 571 F.2d 141 (3d Cir. 1978), in arguing against application of Cantor. This reliance is misplaced. In Mobilfone the Court of Appeals found the Parker exemption to be justified due to the pervasive regulation of the defendant telephone system pursuant to the Pennsylvania Public Utility Code, the same code under which Penn ...


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